Global storage not tanked up enough
World commercial oil inventories continued their declining trend over the past year. Oil storage owners face a mixed market
In this article, PE looks at the evolution of storage trends in the industry. Part I of II.
Regional trends across the globe are uneven, with supply bottlenecks increasing storage demand in some areas, while other markets are flat to lower. With oil markets expected to remain in backwardation, trader demand for storage is expected to remain lacklustre through 2019.
According to the International Energy Agency (IEA), commercial oil inventories in rich countries, which peaked at the end of 2016, continue to draw. The IEA estimates that the second quarter saw a commercial year-on-year stock draw of 253m barrels, falling by 7.2m barrels in June from May for the eighth decline in 11 months. At the end of June, stocks were 32m barrels below their five-year average, and represented 59.2 days of forward demand, down from 63.2 days a year earlier.
In its 13 September Oil Market Report, the IEA highlighted regional differences in stock draws, noting that "most of the action took place in the Americas, where crude stocks declined sharply because of record-high refinery throughput and crude exports". Within the Americas, however, there were sharp regional differences as Canadian stocks built, while historically important Cushing storage volumes declined sharply.
North America is still adjusting to the boom in US liquids output and to Canadian logistics constraints. Meanwhile, forward pricing curves see the market firmly in backwardation, which eliminates traders' incentive to store oil and is reflected in major independent oil storage companies' occupancy figures. Analysts believe current tight world oil market supply conditions, including Venezuela's precipitous output decline and US sanctions on Iranian oil exports, will keep the market in backwardation through at least 2019. They note, however, that certain regional markets, including North Asia and mid-continent US, may show short-dated contangos as these markets resolve short-term, area-specific supply tightness.
Offshore, floating oil storage appears to be making a comeback in the Gulf. Iranian floating storage volumes have risen to at least 15m barrels as the US-sanctioned country's oil sales have slowed, according to Lisa Ward, Co-Founder of tanker tracking website TankerTrackers.com.
Leading international storage firms' 2017 profitability and activity reflected the market. Royal Vopak NV, the world's largest independent storage concern with nearly 36m cubic metres of capacity worldwide, reported net profit attributable to ordinary shareholders, net of exceptional items, of €287.4m ($338m) for 2017. This is down nearly 12% from €326.1m million the previous year.
394m barrels—US crude oil in commercial storage
Privately-held competitor Marquard & Bahls, owner of the world's second-largest storage company, Oiltanking, which doesn't publicly report financial results, registered storage throughput of 159.5m tonnes in 2017. The result was up slightly from 156.8m tonnes in 2016. Oiltanking controls 21.1m cubic metres of storage worldwide.
But company financial performance is a lagging indicator of the market, which now looks even less likely than 2017 to remunerate storage plays. Both Vopak and Oiltanking have indicated that storage occupancy is declining this year. Vopak reported first-half storage occupancy of 86%, compared with 90% for 2017 as a whole and 93% in 2016, attributing the decline "primarily to a presently less favourable oil market structure". Marquard & Bahls tersely reported a "successful, albeit mixed, year" for Oiltanking's 2017 business.
North America bottlenecks
US and Canadian oil storage is rapidly evolving to accommodate increased output on both sides of the border as saturated domestic markets put a premium on improving logistics bottlenecks for export markets. "The bottlenecks are the main story of 2018. Until additional pipeline capacity is built, storage construction will be the focus", says Alex Geisler, an oil storage analyst at inventory analysis firm Genscape.
Geisler and others note that storage requirements are changing rapidly in both the US and Canada. With crude oil production booming in the prolific Permian Basin and Western Canada, the existing infrastructure network is struggling to transport additional output to end-users. Companies are planning new pipeline projects to relieve the constraints; but storage near producing regions—and in the US Gulf Coast, to feed crude exports—will be an important point of focus until the new infrastructure is built. Crude deliveries by rail have increased in recent months, but can't relieve all the stress on the system.
According to the US Energy Information Administration (EIA), US crude oil in commercial storage totalled 394m barrels, down from 470m barrels in September 2017. But the decline masks differing trends in storage capacity use in different regions. At Cushing, Oklahoma, storage capacity utilisation was 43% in March, compared with 78% in September last year. Utilisation is estimated by Genscape to have fallen below 40% since then, to near record low levels. Meanwhile, in the US PADD-3 region, which includes the US Gulf Coast refining centre and most US oil export terminals, crude storage capacity used stood at 56% in March, compared with 61% in September 2017.
The current backwardated market structure is discouraging companies from holding inventory, with current West Texas Intermediate (WTI) futures showing 20-30 cents a barrel backwardation from the October delivery month. But analysts believe that the larger drop in Cushing storage use rates also reflects current high throughputs at US refineries, as well as Texas' rebound as a crude oil production centre and rising US oil exports. According to the IEA, total US exports of crude and petroleum products averaged 7.8m barrels a day in June, compared with 6.4m b/d in 2017, and 5.3m b/d in 2016.
Canada has over 7.7m barrels of new storage capacity under construction
Analysts say this shift towards oil exports, which is concentrated on the US Gulf Coast and coincides with strongly rising production of mainly Light Tight Oil from Texas fields, is leading to a restructuring of the US oil transportation framework. Consultancy Wood Mackenzie believes that the concentration of new storage construction will be along the planned routes of new pipelines to ship oil from the Permian Basin and Eagle Ford production areas, and at the favoured export terminal of Corpus Christi. This rapidly developing new infrastructure for oil export trade will require sales in at least million-barrel lots to be economic. Wood Mackenzie estimates that the Corpus Christi area will eventually add 36m barrels of storage capacity to handle projected oil exports.
In the short term, Houston has 7.2m barrels of storage under construction, while the Beaumont-Nederland area has over 3.1m barrels of new capacity being built. Occidental Petroleum, Energy Transfer Partners and Enterprise Products Partners LP are among the companies leading development of new storage and pipeline logistics developments on the US Gulf Coast. Export developments are being extended offshore: in July, commodities trader Trafigura Beheer formally launched a project to develop an offshore loading facility that would enable shipments on very large crude carriers of 200,000 deadweight tonnes of more from Corpus Christi. Currently, larger ships carrying US crude exports must rely on lightering by smaller vessels.
Canadian crude exports are also encountering constraints as production rises. According to the IEA, Canadian crude production is running at just under 5m b/d. The IEA forecasts a rise of just under 500,000 b/d in 2019, but analysts and industry officials say the country has run up against logistical problems as new export facilities are encountering difficulties in obtaining provincial approvals. In particular, the Trans-Mountain pipeline expansion to Canada's Pacific coast, originally developed by the Canadian unit of Kinder Morgan and now owned by Canada's federal government, has been blocked by protests. That expansion was expected to add 590,000 b/d to Canadian export capacity.
According to Genscape's Canada Crude Storage report, crude oil in storage in Western Canada jumped to a record 36.4m barrels in early September from 32m barrels at the end of July. Industry officials say that rail deliveries of Canadian crude have also been curtailed due to priority given to grain shipments and a shortage of locomotives, though they add that rail constraints may ease through the end of the year. Meanwhile, Canada has over 7.7m barrels of new storage capacity under construction.
Analysts say that Canadian storage developers are faced with a conundrum: new capacity will initially earn higher storage fees, but as additional pipeline capacity comes on stream the need for additional storage will fall and so will revenues. "It's a capital allocation question," says one analyst, adding that such uncertainty may contribute to constrained storage availability, and consequently constrained Canadian oil output, until new pipelines are brought into operation.
Canadian producers are hoping that the projected 830,000-b/d Keystone XL and 760,000-b/d Line 3 lines to Nebraska and Wisconsin, developed by TransCanada and Enbridge, will proceed. All the pipelines will improve Canadian oil producers' revenues, which are currently limited by the cost of transporting crude for export.