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Storage is the hottest commodity right now in oil markets

Justin Ho Mar 31, 2020
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The price to store oil is soaring. Above, a pipeline carries oil at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. Joe Raedle/Newsmakers
COVID-19

Storage is the hottest commodity right now in oil markets

Justin Ho Mar 31, 2020
The price to store oil is soaring. Above, a pipeline carries oil at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. Joe Raedle/Newsmakers
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The price of oil is way down right now, at roughly $21 a barrel. With air travel also way down and hardly anyone on the road these days, the demand for oil just isn’t there. But all that oil out there has gotta go somewhere, right? The storage of commodities is the real hot commodity right now.

The United States has the infrastructure to store unused oil, whether it’s in old salt caverns along the Gulf Coast or oil tankers that float offshore. But Jim Burkhard, vice president and head of crude oil research and energy and mobility research at IHS Markit, said with demand plummeting, that storage is reaching full capacity.

“The infrastructure is not built to handle a 20% to 25% overnight collapse in oil demand,” Burkhard said.

There are reasons why a producer would keep pumping oil now. Burkhard said shutting down a drilling rig can damage a reservoir.

Tom Seng, director of the School of Energy Economics, Policy and Commerce at the University of Tulsa, said smaller producers might have to keep pumping oil, despite the low prices they’re getting for it.

“Even though on the books it’s going to be a loss, they’ve got to have some cash flow to maintain operations,” Seng said.

And that’s just in the United States. Matt Smith, director of commodity research at ClipperData, which tracks flows of crude oil around the world, said the oil production war going on overseas will dump even more crude onto the market.

“We’re going to see a lot of barrels coming to market in the next few weeks, not only from Saudi Arabia, but likely from Russia [and the] United Arab Emirates,” Smith said. He added that the price of storage is shooting up.

Oil tanker rates have reportedly doubled from last week. Burkhard said if storage capacity runs out, U.S. oil production might have to start shutting down.

“At current production levels, the oil supply surplus will exceed the ability to store it,” Burkhard said. “Something’s got to give.”

He estimates that by next year, U.S. production could drop by nearly a third. 

COVID-19 Economy FAQs

Are states ready to roll out COVID-19 vaccines?

Claire Hannan, executive director of the nonprofit Association of Immunization Managers, which represents state health officials, said states have been making good progress in their preparations. And we could have several vaccines pretty soon. But states still need more funding, she said. Hannan doesn’t think a lack of additional funding would hold up distribution initially, but it could cause problems down the road. “It’s really worrisome that Congress may not pass funding or that there’s information circulating saying that states don’t need additional funding,” she said.

How is the service industry dealing with the return of coronavirus restrictions?

Without another round of something like the Paycheck Protection Program, which kept a lot of businesses afloat during the pandemic’s early stages, the outlook is bleak for places like restaurants. Some in the San Francisco Bay Area, for example, only got one week of indoor dining back before cases rose and restrictions went back into effect. Restaurant owners are revamping their business models in an effort to survive while waiting to see if they’ll be able to get more aid.

How are hospitals handling the nationwide surge in COVID-19 cases?

As the pandemic surges and more medical professionals themselves are coming down with COVID, nearly 1 in 5 hospitals in the country report having a critical shortage of staff, according to data from the Department of Health and Human Services. One of the knock-on effects of staff shortages is that people who have other medical needs are being asked to wait.

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