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BUSINESS
Tom Kloza

U.S. oil storage crunch might cut crude prices

Paul Davidson
USA TODAY
The USA has been producing more oil than it's consuming, filling up storage facilities.(AP Photo/Tulsa World, Michael Wyke)

The U.S. is running out of places to stash its overflowing oil supplies, threatening to further drive down crude prices that rebounded in recent days.

Supply — including oil produced in the U.S. and imported — has been outpacing U.S. refiners' demand by about 1 million barrels a day on average since early January, according to the Energy Information Administration.

Advanced drilling techniques that extract crude from shale rock have made the U.S. the world's No. 1 producer of oil and natural gas liquids. The surge has outpaced a less dramatic rise in U.S. consumption, and exports of gasoline and diesel. Also, many refiners have shut down some operations for a maintenance season likely to run another month or so.

The surplus oil goes into storage, with 8.2 million barrels stocked away last week, EIA figures released Wednesday show. Oil inventories are the highest in at least 80 years. The industry is using about 67% of the 520 million barrels of working storage capacity across the nation, up from 48% in early 2014. Much of the tanks are filled by traders who buy oil at today's contract price of about $48 a barrel, store it, and sell futures contracts to deliver the crude in a year at higher price, turning a profit after paying storage costs.

In Cushing, Okla., the nation's delivery point for such swaps, 80% of the region's 71 million barrels of storage space is occupied, up from 24% in October. That means it's close to effective capacity because a portion of the tanks is earmarked for moving oil in and out each day, while some is set aside for grades of crude that may not match customer needs.

"More oil is being stored (in Cushing) than ever before," says Hillary Stevenson, manager of supply chain networks for Genscape, a research firm that surveys oil inventories. "They are getting very full."

Brian Busch, Genscape's director of oil markets, expects Cushing's tanks to reach their limit by late April or early May.

That's likely to ripple across the country, analysts say. Although storage is available elsewhere, such as in the U.S. Gulf of Mexico region, traders must pay to transport it to Cushing. The higher costs would force sellers to reduce oil prices to preserve traders' profit margins and keep their business, says oil analyst Andy Weissman of EBW Analytics.

And with storage capacity constrained, surplus oil that can't be stocked is likely to be thrown onto an already oversupplied U.S. market, further pushing down crude prices, Busch says.

Weissman predicts the storage crunch will drive down the U.S. benchmark price another $5 in coming weeks, though he says a drop of as much as $12 is possible.

Malcolm Turner, CEO Of Turner Mason consulting, thinks any U.S. storage shortage will be mild and play a small role in industry dynamics, reducing prices by less than $2 a barrel. Besides abundant U.S. production, global oil prices have been held down by weak overseas economic growth.

The storage pinch should ease when the refinery maintenance season ends in four to six weeks, says Robert Merriam, EIA's manager of petroleum supply statistics. But Stevenson says it could continue for months if it remains profitable for traders to hoard crude for future delivery.

Last week, the price of West Texas Intermediate (WTI) edged up about $1 a barrel to about $50 after Saudi Arabia's air strike of Yemen sparked fears of oil supply disruptions. The increase narrowed the spread between current prices and the price for delivery in a year to about $8 from $11 a few weeks ago.

If WTI prices drift still higher, it could erase traders' profit margins after accounting for storage fees, helping ease the storage bottleneck, Stevenson says.

But Tom Kloza, global head of energy analysis for the Oil Price Information Service, says the recent hike is likely to be temporary with prices falling back toward $40 in coming months and storage concerns intensifying.

The situation has revived calls by oil producers to lift a U.S. ban on crude exports that has tempered prices.

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