Crude in storage growing

Oil in storage keeps growing and growing.

http://www.eia.gov/petroleum/weekly/images/crstusm.gif

Storage capacity grew since the recession-driven glut of 2009 through the pipeline-restriction WTI glut in Cushing of 2013.  Now all the storage is filling at once, at a rate of about a million barrels per day.

Why?  Production, for one -- even at today's lower prices most (almost all) wells are economic to produce, so producers work harder to sell more quantity to compensate for lower margins so they can cover costs.  Some will succeed, while some won't.  For storage, it's a no-brainer for investers, as the contango of the futures chain says they can buy low now and sell high next spring with virtually no risk. 

Rigs are dropping, and have been for six months, but production flattened for the first time this week.  Investors bid up oil prices on this news, and the continuing rig count drops, and some unrest in the Mid-East, but I think they are overly optimistic.  Unless consumption rapidly picks up, and with China slow, the EU in a morass, and Russia in a pinch, covering the 2mpd+ production glut will not come quickly. 

Besides the 1mbpd going into storage in the US crude stocks, refined products are up a bit as well.  More importantly, floating storage filled, and so did China's SPR.  I see this week that the bump in prices has halted the growth of floating storage, so the delivery pipeline (firgurative - as in market, not necessary a physical one!) is going to congest a bit.    Currently, there is about 440mbbl of official storage capacity in the US.  From the graph above, we're at about 410.  In another few weeks, we'll be bumping at the top.

Even if we assume there is some unofficial storage that will fill (tank cars, barges, refineries, etc.), that will go fast.  Unless production drops before the tanks fill up, WTI will take a hard hit, and fast.  If floating storage fills up (which would take longer), then worldwide prices will drop.  Worst case, they'll drop to the marginal cost of existing production, which would be $33 or lower, versus the nebulous space they are now between marginal cost of existing production and cost of new production.  Once China's SPR fills (nobody knows for sure quite when, but it will be soon), another 1mbpd of excess production will be on the market, and those tankers will idle, and they will quickly fill with oil, too.

We have less than sixty days for production to drop significantly, else prices will collapse.  As for the bump this week, either the market is more confident than I that production will drop quickly, or it believes economies will expand faster, or it is overconfident.  The remaining option, as always, is for war to break out in a producing nation.