In a world awash in crude, oil producers and traders are facing a billion-barrel conundrum: where to put it all.
U.S. crude-oil supplies are at their highest level in more than 80 years, according to data from the Energy Information Administration, equal to nearly 70% of the nation’s storage capacity. A U.S. storage hub in Cushing, Okla., is expected to hit maximum capacity this spring. While estimates are rough, Citigroup Inc. believes European commercial crude storage could be more than 90% full, and inventories in South Korea, South Africa and Japan could be at more than 80% of capacity.
The danger of running out of places to stash crude: Some analysts predict prices, already down 50% since June, could spiral even lower as producers sell oil at a discount to the few remaining buyers with room to store it. Consumers, though, would continue to be big winners as refineries convert an ocean of crude into gasoline and other fuels.
“The inventory levels are actually getting scary,” said Harish Sundaresh, portfolio manager and senior commodity strategist for Loomis, Sayles & Co., which manages about $230 billion. “When I look at storage, it doesn’t seem to me that we have enough.”
Still, relief may eventually be in sight. More storage tanks are being built across the U.S., and some large tanker ships are being leased to house the oil.
When oil supply and demand are roughly in balance, storage depots in tanks and underground salt caverns serve as a place where crude can sit for a few days while a trader finds a buyer.
But producers are pumping nearly 1.5 million barrels a day more crude than the world needs, due to a combination of slowing demand and rising production in the U.S. That means oil put in storage today could be there for years, analysts say. Should the glut worsen, more producers could be forced to shut their wells, effectively storing the oil in the ground.
Mr. Sundaresh and his team, who oversee $5 billion, have bet that oil prices will fall, based on the shortage of storage. On Thursday, oil for April delivery fell 77 cents, or 1.5%, to settle at $50.76 a barrel on the New York Mercantile Exchange.
Storage space is becoming a tradable commodity. CME Group Inc., which owns the Nymex, plans on March 29 to launch the first oil-storage futures contract. The contract will allow traders and producers to buy and sell the right to store certain types of oil in Lafourche Parish, La., for a specific month.
Since 2009, the last time inventories were high, a boom in tank construction has added tens of millions of barrels to U.S. storage capacity. Still, that is filling up fast.
Outside the town of Cushing in central Oklahoma, Mark Hurley is the gatekeeper to neat rows of crude-oil storage tanks.
The tanks, which can hold a combined 6.6 million barrels of crude—enough to fill more than 400 Olympic-size swimming pools—are all fully leased through the end of the year.