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Oil market contango keeps US tank terminals at capacity

With the oil market in contango, traders have a strong incentive to put crude and refined products into storage, which is good news for tank-farm operators, writes Anne Feltus

IT IS A GREAT time to be in the US oil terminalling business. Tank farms across the country are bulging with crude oil and petroleum products as a result of almost unprecedented demand for storage capacity. By late October, oil inventories had risen to volumes almost 30% higher than the same period in 2008, according to the government's Energy Information Administration (EIA), and distillate stockpiles had reached their highest level in almost 30 years.

A combination of forces has been working to the terminal owners' advantage. With several large discoveries in the deep-water Gulf of Mexico (GOM) coming on stream (PE 12/09 p19), the EIA projects total domestic oil production for the year will rise for the first time since 1991. Meanwhile, the depressed economy has driven down consumption of crude oil and refined products. In October, demand for oil dropped to its lowest point for this month in 14 years.

Low interest rates have also contributed by reducing the cost of holding products. More importantly, however, has been the market's contango, which has persisted throughout the year. With future prices for commodities running higher than spot prices, traders have a strong incentive to buy and store oil and sell it later.

Oil prices experienced extreme volatility in the second half of 2008, rising to more than $147 a barrel in July 2008, then falling to less than $34/b in late December, the most dramatic decline in crude prices in recent history. Since then, crude has experienced a robust recovery, reaching $82/b in mid-October.

Good news for tank-farm owners

That is good news for tank-farm owners. In December 2008, oil inventories in Cushing, Oklahoma, the delivery point for futures traded on Nymex, rose by more than 40% to the highest level since the government started collecting information on the complex in April 2004. The world's largest commercial crude-storage hub, Cushing holds as much as 10% of total US domestic storage capacity.

Nationwide, available tankage for crude and petroleum products has been in such short supply that traders have been leasing vessels for offshore storage (PE 12/09 p31). This is not a new strategy, but one that has been employed with much greater frequency, not only because of the space constraints onshore, but also because an oversupply of vessels has pushed down the cost of chartering them.

Offshore storage reached a record 100m barrels in April, the highest level in two decades. Since then, however, it has dropped significantly – to about 32m barrels in November – as the price differential between the near-term and futures contracts shrank below the cost of offshore storage. But crude and refined products still remain stockpiled in several dozen tankers.

Not surprisingly, these conditions have had a positive impact on terminal operators' bottom lines. NuStar Energy, owner of 60 crude oil and intermediate feedstock storage tanks in Texas and California, with a total storage capacity of about 12.5m barrels, reported that operating income from its storage segment in the third quarter of 2009 rose by 46% compared with the same three months in 2008.

Operating income at Sunoco's terminal-facilities segment rose to $20.7m for the third quarter of 2009, about $7m more than the same period last year. The company owns and operates three crude-storage terminals, including a 19m barrel facility in Nederland, Texas, that ranks as one of the largest onshore crude facilities in the country.

Some companies are capitalising on the advantageous environment by constructing new capacity. Sunoco Logistics Partners has added tanks at Nederland. Magellan Midstream Partners, which announced record third-quarter results from its terminal segment, has expanded the storage capacity at its marine terminal in Galena Park, Texas, by 0.6m barrels and plans to increase capacity at its Longhorn Pipeline terminal in El Paso, Texas, from 0.9m to 1.3m barrels in first-quarter 2010.

NuStar has "a renewed focus on high-growth opportunities, with the next phase coming from a combination of fee-based and margin-based projects totalling over $0.5bn over the next two to three years", according to chief executive Curt Anastasio. "The largest portion of this growth-capital programme will consist of investment at storage facilities to construct new tank storage for third parties at strategic domestic and international terminals, to blend crude oil and heavy fuel oil at certain terminals and to develop and improve logistics at key terminals."

Mergers and acquisitions have continued as companies jockey for a competitive position. In June, Enterprise Products Partners agreed to acquire Teppco Partners for about $3.3bn, creating the biggest energy partnership in the US. Although the combined companies' focus is on pipelines, it also owns 200m barrels worth of storage capacity for oil and other liquid fuels.

In October, worldwide commodities trader Vitol, based in the Netherlands, agreed to acquire the general partnership of SemGroup Energy Partners from Manchester Securities. SemGroup's assets include about 8.5m barrels of oil-terminalling facilities and storage tanks in the US Mid-Continent, including about 7m barrels of capacity at Cushing.

Earlier this year, SemGroup sold much of its SemFuel refined-petroleum unit to Magellan Midstream Partners and QuikTrip for a total of $37m. The move marked the first venture into the terminalling business by QuikTrip, a convenience store enterprise.

In August, Global Partners agreed to acquire three refined-products terminals in New York, with a combined capacity of 0.95m barrels, from Warex Terminals, for $47.5m. In October, Buckeye Partners, which owns 64 products terminals, announced plans to acquire three products-storage and distribution terminals, with a total capacity of 3.2m barrels, along with other assets, in the Chicago and St Louis areas from ConocoPhillips to gain greater access to important markets and refinery operations in the Midwest.

Plains All American Pipeline recently purchased 290,000 barrels of products-storage capacity in Philadelphia. The company also acquired 400,000 barrels of crude-storage capacity in Tulsa, Oklahoma, from Holly in October and is leasing it back to Holly. The two companies "have also contractually agreed to explore the use of Holly and Plains Tulsa storage facilities to capture profit opportunities that may arise from the crude market contango, given the facilities "close proximity to Cushing".

As the new year begins, terminal operators have reason to remain optimistic. Crude and petroleum products inventories are likely to stay high through 2010, the EIA predicts, and demand is not expected to return to previous levels for another year at least. Meanwhile, deep-water GOM discoveries continue to come on stream.

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