COVID-19

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

Will the federal government extend the extra COVID-19 unemployment benefits?

It’s still unclear. Congress and President Donald Trump are deciding whether to extend the extra $600 a week in unemployment benefits workers are getting because of the pandemic. Labor Secretary Eugene Scalia believes the program should not be extended, and White House economic adviser Larry Kudlow said the additional money is disincentivizing some workers from returning to their jobs. Democrats want to keep providing the money until January.

As states lift restrictions, are people going back to stores and restaurants?

States have relaxed their restrictions, and many of us have relaxed, too. Some people have started to make exceptions for visiting restaurants, if only for outdoor dining. Some are only going to places they trust are being extra cautious. But no one we’ve talked to has really gone back to normal. People just aren’t quite there yet.

Will surges in COVID-19 cases mean a return to lockdowns?

In many areas where businesses are reopening, cases of COVID-19 are trending upwards, causing some to ask if the lockdowns were lifted too soon, and if residents and businesses might have to go through it all again. So, how likely is another lockdown, of some sort? The answer depends on who you ask. Many local officials are now bullish about keeping businesses open to salvage their economies. Health experts, though, are concerned.

You can find answers to more questions here.

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