Oversupply vs Storage (and when do we run out of it?)

[Douglas Buckland + 6,308]

https://www.news-journal.com/news/business/sitton-the-u-s-must-protect-free-markets-in-the/article_6a79a240-6aba-11ea-a17e-df45acfe727b.html

Okay, from the article above, the ‘best case’ is that we are presently oversupplied by roughly 10 million barrels of oil per day. This equates to about 300 million barrels a month, or 3.6 billion barrels per year.

In layman’s terms, this is 20.2 billion cubic feet.

The capacity of the US Strategic Reserve is 797 million barrels.

We have apparently been in this oversupplied condition for years.

 My question is, “Where the heck have we been storing the stuff?”

Eventually, it would seem, we would simply run out of storage volume!

If we run out of places to store the excess oil, wouldn’t that force a global production halt?

[James Regan + 1,776]

2 hours ago, Douglas Buckland said:

https://www.news-journal.com/news/business/sitton-the-u-s-must-protect-free-markets-in-the/article_6a79a240-6aba-11ea-a17e-df45acfe727b.html

Okay, from the article above, the ‘best case’ is that we are presently oversupplied by roughly 10 million barrels of oil per day. This equates to about 300 million barrels a month, or 3.6 billion barrels per year.

In layman’s terms, this is 20.2 billion cubic feet.

The capacity of the US Strategic Reserve is 797 million barrels.

We have apparently been in this oversupplied condition for years.

 My question is, “Where the heck have we been storing the stuff?”

Eventually, it would seem, we would simply run out of storage volume!

If we run out of places to store the excess oil, wouldn’t that force a global production halt?

Okay so I went to Wiki- So this is the US SPR 797 Million capacity  -https://en.wikipedia.org/wiki/Strategic_Petroleum_Reserve_(United_States)

So they need 77 million to fill it which Trump has agreed to - https://www.energy.gov/articles/department-energy-executes-direction-president-trump-announces-solicitation-purchase-crude they will fill at 685 Thousand Bbls a day thats 112 days to fill it up. ( 3 months and 8 days)

Gonna take a load of water to retrieve it 7Bbls of water per 1 Bbl of Oil returned. (I guess they are not bothered about retrieval at this stage)

Where will the rest go, back down hole? As per your numbers above it leaves 9.3 Million of over supply to find a home.

If you were thinking logically as these wells can be turned off and on like taps apparently, as they have zero delay in restarting, it would make sense to shut the well in rather than produce for the sake of producing at a loss, isn't this the logical thing to do with such an ON/OFF system?

Edited March 23, 2020 by James Regan

[Rob Kramer + 696]

I've read operational updates and found 4 companies have shut in higher cost wells or restricted flow or slowed esp. Also all companies have cut capex and theres a 10 -30% production  decline starting now .... I guessing that's not factored into the news. I didnt read it . But if canada and Colombia are doing it and theres some blockades in peru ... I'd expect everywhere to have decline and shut its happen.  Even at 10 globally that's 10M barrels a day by end of year . And us is gonna be closer to 2.5M down even with help.

Edit- eric nuttall posted the Permian decline is 39% and eia DPR has only Permian growing . So even a 1mbd drop is large plus all other basins plus natural gas liquids. Its gonna be alot offline. But if everywhere closes down for 2 months I can't see how most oil wouldn't have to stop for a while . The Hamilton steel plant is catching up and stacking slabs during this time. But if there forced to close that's tons of electricity and nat gas and shipping offline. Like the auto makers that closed in canada.

Edited March 23, 2020 by Rob Kramer
Added info

[Rob Kramer + 696]

FEC.to today. "With these changes, revised average annual production in 2020 is expected to be in the range of 55,000 to 60,000 boe/d, a decrease of only 8% compared to 2020 guidance despite the significant decrease in capital expenditures. The Company has deliberately shut-in a number of wells that are not economic to operate at current prices and will monitor operations continuously to optimize cash generation. "

They ended q4 19 72k boe. I have no position in the company. 

Edit - 60% capex cut to 130-150M USD 

Edited March 23, 2020 by Rob Kramer
Info

[Rob Kramer + 696]

CALGARY, Alberta, March 22, 2020 (GLOBE NEWSWIRE) -- Husky Energy (HSE.TO) today announced that it will begin a systematic and orderly suspension of major construction activities related to the West White Rose Project.

future oil offline and construction activity that uses oil canceled. Still the law of equal and opposite reactions apply.  

[ceo_energemsier + 1,818]

Companies are shutting in wells that are higher costs. Besides the SPR, there is a sizeable volume available in mid stream companies for storage. Companies are also chartering vlcc's /ulcc's to store crude on the water.

China is buying crude oil for their strategic reserves , they can buy at really low prices and save a lot of $$.

Maybe its time to increase the US SPR size and build more UST and AST

 

Edited March 23, 2020 by ceo_energemsier
Adding

[ceo_energemsier + 1,818]

https://www.reuters.com/article/us-health-coronavirus-oil-api/u-s-oil-industry-asks-trump-for-regulatory-relief-during-coronavirus-outbreak-idUSKBN2172W0

[ceo_energemsier + 1,818]

https://www.barrons.com/articles/oil-crude-coronavirus-china-demand-51582914201

[Rob Kramer + 696]

I have read oil barrels (the original oil storage ?) Are 17c of steel . So sold and delivered what 50c? All these companies have tons of lands cant they get US contracts on barrels and store and re sell later? Probably well worth the effort! If closing wells is better for oil producers till prices are high cant refiners or pipelines buy barrels (in barrels?) Train tankers .... ect? 

[KeyboardWarrior + 527]

1 hour ago, Rob Kramer said:

I have read oil barrels (the original oil storage ?) Are 17c of steel . So sold and delivered what 50c? All these companies have tons of lands cant they get US contracts on barrels and store and re sell later? Probably well worth the effort! If closing wells is better for oil producers till prices are high cant refiners or pipelines buy barrels (in barrels?) Train tankers .... ect? 

I can tell you that if my ammonia plant was built, I would have contracted my gas as far out as possible. 

[ronwagn + 6,290]

8 hours ago, Douglas Buckland said:

https://www.news-journal.com/news/business/sitton-the-u-s-must-protect-free-markets-in-the/article_6a79a240-6aba-11ea-a17e-df45acfe727b.html

Okay, from the article above, the ‘best case’ is that we are presently oversupplied by roughly 10 million barrels of oil per day. This equates to about 300 million barrels a month, or 3.6 billion barrels per year.

In layman’s terms, this is 20.2 billion cubic feet.

The capacity of the US Strategic Reserve is 797 million barrels.

We have apparently been in this oversupplied condition for years.

 My question is, “Where the heck have we been storing the stuff?”

Eventually, it would seem, we would simply run out of storage volume!

If we run out of places to store the excess oil, wouldn’t that force a global production halt?

The storage is for emergency use, at least in my understanding. Am I wrong? After that, we need lower production or will have lower prices. That will balance out, that is how capitalism works. We must keep imports out through tariffs or whatever, that is enforcing fair trade.

[J.mo + 165]

So how about the crack spread..

[ceo_energemsier + 1,818]

9 hours ago, Rob Kramer said:

I have read oil barrels (the original oil storage ?) Are 17c of steel . So sold and delivered what 50c? All these companies have tons of lands cant they get US contracts on barrels and store and re sell later? Probably well worth the effort! If closing wells is better for oil producers till prices are high cant refiners or pipelines buy barrels (in barrels?) Train tankers .... ect? 

Storage for contango is being done already, millions and millions of barrels are being stored for sale later at a higher price.

Traders and oil companies are leasing up storage both onshore and offshore (tankers) and move oil around for all the way in  China and , India, The Netherlands among other countries.

Great time to buy physical barrels if you have the financial capability and the logistics for that.

There is plenty of land for building new tanks, I have also seen oil being moved to Cushing for storage.

[ceo_energemsier + 1,818]

The U.S. Department of Energy (DOE) announced last week that it will fill the Strategic Petroleum Reserve (SPR) to its maximum capacity by purchasing 77 million barrels of American crude oil.

A solicitation for the purchase of an initial 30 million barrels has already been announced. Under the solicitation, the DOE will purchase sweet and sour crude oil with a focus on small to midsize U.S. oil producers, it outlined. The solicitation is for crude oil to be delivered in May and June, although early April deliveries are being encouraged.

Solicitations for additional purchases will follow, the DOE confirmed. The department said it is working with congress to finalize the funding to support the purchase of the full 77 million barrels of oil.

“DOE is moving quickly to support U.S. oil producers facing potentially catastrophic losses from the impacts of COVID-19 and the intentional disruption to world oil markets by foreign actors,” U.S. Energy Secretary Dan Brouillette said in a government statement.

The Under Secretary of Energy Mark W. Menezes said, “the small to midsize oil producers, which are the focus of the initial crude oil purchase, employ thousands of Americans”.

“These businesses have been particularly hard hit by recent events but under President Trump’s leadership, we are taking swift action to assist hard hit producers and deliver strong returns to the taxpayer,” he added.

Last month, the DOE’s Office of Fossil Energy announced a notice of sale of crude oil from the SPR. That action was suspended earlier this month however, “in light of the recent fluctuations in global oil markets”, DOE Spokesperson Jess Szymanski confirmed.

The DOE’s mission is to ensure America’s security and prosperity by addressing its energy, environmental and nuclear challenges through transformative science and technology solutions, according to its website. Th department was established in 1977.

[Dan Clemmensen + 1,011]

The articles I have read in the last few days computed global available storage of all types, global supply, and global demand. Available storage includes all the possible places you can put the oil, meaning all countries' SPRs, all VLCCs, all tankage, all pipelines, etc. that have available capacity. At the global level, the number I recall is 1.5 billion bbl of current available storage capacity, and the excess global supply (supply minus demand) is 20 million bbl/day. If my poor memory is correct, the world, not just the US, runs out of storage in 75 days, so we have that long to reduce supply by 20 million bbl/day. If we reduce at a linear rate, we must equalize in 150 days so every day starting now we need to reduce by another 133,400 bbl/day of production. This is worldwide. As storage cost would increase dramatically as we near capacity, it is more realistic to equalize in 100 days, so the world needs to turn off an additional 200,000 each day. I have zero knowledge of what you do to turn off an oil well. How many wells need to be turned off to stop 200,000 bbls? Do I just call up the foreman can say "Joe, turn off well # 65 today"?  After supply is reduced to match demand, the oil in expensive storage must be retrieved and sold, so new supply must continue to be reduced further, lets say at the same 200,000 bbls turned off each day until we get to (say) a supply deficit of 5 million bbl/day, until demand recovers.

[Gerry Maddoux + 3,627]

^ 

The obvious solution to this parody is for the president of the United States to call up MbS and tell him that he has two options: 1) NOPEC. or 2) Tariffs. 

NOPEC would kill the KSA and there is a great deal of pressure to enact something like it. 

Tariffs would kill the KSA in a different way. 

But either one would be far superior to an outright embargo, which could be the third option. 

To produce until there is nowhere to put oil? Well, should the KSA decide to do this, then when they get their tail in a crack over in the ME, we let them resort to their superb military. Somewhere in here, in the midst of the world falling apart, common sense must prevail. If it doesn't, then it needs to be pounded in someone's head.

[Dan Clemmensen + 1,011]

10 minutes ago, Gerry Maddoux said:

^ 

The obvious solution to this parody is for the president of the United States to call up MbS and tell him that he has two options: 1) NOPEC. or 2) Tariffs. 

 

How do these options or an embargo affect supply global supply? The US is now an net exporter. Somebody somewhere needs to quit producing.  The NOPEC option is ironic:  A trust usually tries to force prices UP, but right now the Saudis are trying to force prices DOWN.

[Douglas Buckland + 6,308]

Guys, what I was trying to get at, is that during the past decade, or however long we have been oversupplied, we should have ALREADY run out of storage!

There seems to be something wrong with either the rate of oversupply OR the amount of storage volume available!

[Dan Clemmensen + 1,011]

13 minutes ago, Douglas Buckland said:

Guys, what I was trying to get at, is that during the past decade, or however long we have been oversupplied, we should have ALREADY run out of storage!

There seems to be something wrong with either the rate of oversupply OR the amount of storage volume available!

Yep. By definition, supply matches demand+change in storage. Since storage has not expand very much as a percentage of supply, supply and demand have been roughly in balance at somewhere around 100 million bbl/day.   But we now have a sudden dramatic drop in demand due to a factor outside of the usual economic or political factors. The demand is projected to drop by 10% to 20%. I have absolutely no way to evaluate these projections.

[Gerry Maddoux + 3,627]

29 minutes ago, Dan Clemmensen said:

How do these options or an embargo affect supply global supply?

If Saudi Arabia can't get oil to their refinery in the US, they're dead in the water, unless they suddenly see the light and cut production.

[Douglas Buckland + 6,308]

7 hours ago, ronwagn said:

The storage is for emergency use, at least in my understanding. Am I wrong? After that, we need lower production or will have lower prices. That will balance out, that is how capitalism works. We must keep imports out through tariffs or whatever, that is enforcing fair trade.

Ron, storage is storage. You have to have a place to put the oversupply globally. My point is, we should have already maxed out storage whether that is strategic reserves, VLCC’s, storage tanks, old soup cans, etc...

 

[Douglas Buckland + 6,308]

 

“Yep. By definition, supply matches demand+change in storage. Since storage has not expand very much as a percentage of supply, supply and demand have been roughly in balance at somewhere around 100 million bbl/day. “

 

If we have been ‘over supplied’ for years, how have we been in balance? You can’t have it both ways!

 

[Dan Clemmensen + 1,011]

47 minutes ago, Douglas Buckland said:

 

“Yep. By definition, supply matches demand+change in storage. Since storage has not expand very much as a percentage of supply, supply and demand have been roughly in balance at somewhere around 100 million bbl/day. “

 

If we have been ‘over supplied’ for years, how have we been in balance? You can’t have it both ways!

 

I was agreeing with you. We cannot have been oversupplied in the physical sense. We were only "oversupplied" from the point of view of people who had a vested interest in higher prices. These folks have been saying that the Permian was living in an economic fantasy land, and for all I know they were correct. But true or not, The physical global supply matched the physical global demand. They were predicting a supply collapse due to bankruptcies. That was completely different than the current situation, which is a demand collapse due to Covid-19.

[Dan Clemmensen + 1,011]

1 hour ago, Gerry Maddoux said:

If Saudi Arabia can't get oil to their refinery in the US, they're dead in the water, unless they suddenly see the light and cut production.

But the US is a net exporter now. If they fill up the non-US storage, they will be forced to stop pumping, but so will we.

[Gerry Maddoux + 3,627]

17 minutes ago, Dan Clemmensen said:

But the US is a net exporter now. If they fill up the non-US storage, they will be forced to stop pumping, but so will we.

That's not exactly right. At this point, due to the grossly inappropriate actions of a Saudi prince pumping hard during a time of a global catastrophe, the United States should adopt protectionist policies. That would mean a) placing a stiff tariff or a complete embargo on Saudi oil, and b) utilizing our own domestic oil for the petroleum operations in our own country. 

In that circumstance, we no longer care how much the KSA pumps, they just can't bring it to the US, or if so, they'll pay a tariff so high they'll go other places. Canada, our loyal ally during several wars, our land neighbor, has plenty of heavy crude to mix with our LTO to serve up the perfect feedstock to our aging refineries. 

In other words, with a virtual embargo, the KSA is set adrift, to resort to their own devices. We in the United States use our domestic product. They in the kingdom sell theirs where they wish--just not here. 

It would appear to me that this is where we are going. And if we're not, we should be. And trust me, the UK is going to be in a world of hurt when this pandemic is over--they will be importers of our oil. Maybe the EU too, but I wouldn't count on it. 

The Kingdom of SA has generated so much bad will by pumping to drive down the price that not very many countries will lift a hand to help them. If President Trump does, it's because he doesn't understand the American oil business.