The United States is quickly filling up with oil.Government datarecently placed U.S. crude oil stockpiles at 444.4 million barrels, which is more oil than we've had sitting in storage in over 80 years. More oil is pouringinto storage facilities each week as production continues to outstrip demand. Tanks are nearing full capacity, raising the question of what the U.S. will do with all of this oil when there's no place to put it.
Quickly filling upAccording to the U.S. Energy Information Administration, about 60% of the country's working storage capacity is filled, which we can see in the chart below.
While the tanks aren't quite full just yet, the space could be maxed out by the end of April given the roughly 1 million barrels of excess oil bring produced each day. That leaves the country with few options regarding where to put the oil once the tanks are full: Other than building additional storage receptacles, which takes time, the country doesn't have all that much flexibility. That will cause oil tanks to continuefilling up until demand for oil starts to meaningfully increase.
Slowing the pump, but not shutting downOnething limiting flexibility is that oil companies around the world are loathe to shut off oil pumps no matter how much excess exists. If a company can make money today pumping oilit will, even if it could make more later when the oil price is higher. These producers have bills to pay, and shutting down a profitable oil well doesn't help when the company's oil profits are already down.
About the only thing U.S. oil companies are doing now is slowing their oil production rate for the year bycutting investments in new wells. This should naturally lead to reduced production later this year as output rates from legacy wells naturally decline, and thatdrop might not be totallyoffset by the number of new wells. That being said, producers still see output growing through the first half of the year before that decline sets in, which won't help the storage problem. Thishas Americanoil companies pushing for another solution to ease the oil glut.
Opening up the floodgatesWith U.S. storage capacity at the brim, and U.S refining capacity already strained, American oil companies hope the situation willfinally lead to the U.S. oil export ban being lifted. The 40-year-old prohibition was enacted when U.S. oil production was peaking and OPEC was holding back oil. Now, with abundant shale resources overflowing with oil, producers are lobbyingCongress to open up foreign markets to U.S. crude. That would provide some storage relief and likely provide a higher oil price for U.S. oil drillers. That's becauseglobally traded oil, or Brent, currently sells at a $10 per barrelpremium to domestic oil, or West Texas Intermediate, as shown on the following chart.
In exporting our excess oil U.S. producers could take advantage ofthat higher Brentoil price, which would boost their cash flow and make production a bit more profitable. That being said, tepid demand abroad has also left limited storage space outside the U.S. Analysts estimate that Europe's oil depots are already 90% full, while those in South Korea, South Africa, and Japan are thought to be 80% full. Opening the door to U.S. exports could very well exacerbate the problem.China is among the few places thought to be stockpiling oil as it seeks to augment its own strategic petroleum reserve; its facility won't be at full capacity for a number of years as the nation is still building storage tanks. Givingaway ourcheap excess oil to China, though, would be a tough sell in Congress.
Investor takeawayThere are no quick solutions to solving the world's oil glut. Oil storage facilities not just in the U.S., but around the world, are quickly filling to the brim. Meanwhile, oil producers are reluctant to cut output because they desperately need whatever oil cash flow they can get right now. This suggests that outside a very rapid pickup in demand for oil, the market faces a longroad to recovery.
The article Where Do We Put the Oil Now? originally appeared on Fool.com.
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