Crude storage is expected to benefit from the changing price dynamics in the near term, according to Fitch Ratings. Rising US crude production has contributed to the domestic supply glut, which has kept crude prices low. Despite these low prices, the US Energy Information Administration (EIA) reported that domestic crude production was up 12% year over year as of March 13. The current commodity price environment has spurred storage demand.
Between March 2013 and November 2014, crude prices were in backwardation, meaning that the spot price of crude was above the future price. Today, the forward oil price is above the spot price (a contango market condition). The contango market has provided a bright spot for those in crude storage, particularly over the past four weeks as the price of crude delivered in a year has averaged $6.63 a barrel above the spot price. The spread between the spot and future price enables customers to purchase oil today and sell futures at a higher price. The profit is the difference in pricing less storage costs.
The contango market has led to rising crude storage inventories, which are above historical levels. As of March 20, the EIA reported that US crude stocks rose to 466.7 million barrels, the highest level reported since the data were published in 1982. The crude stock inventory includes crude held in storage tanks as well as pipelines and other sources; the EIA estimates the inventory to be 120 million barrels. Therefore, approximately 67% of working storage capacity is utilized of the total storage capacity of 521 million barrels.
While it remains unclear if the US will run out of available storage given the sharp rises in crude inventories, Fitch does not view this as a likely scenario given the ability to currently store an additional 174 million barrels. Seasonal maintenance at refineries tends to occur in the first quarter. However, this past January and February utilization rates were higher than normal, suggesting that some maintenance was deferred. If utilization was more in line with historical rates, crude stocks seen year to date would have been higher. Typically, utilization rates are lowest in the first quarter. It picks up in the second quarter and early part of the third quarter as refiners look to meet higher demand seen during the summer driving season.
In addition to Fitch expecting higher refinery utilization during the warmer months, midstream issuers have been building additional crude storage capacity.
Many crude oil tanks are for the exclusive use of its owner. Other tanks are leased out for short-term or long-term contracts. Issuers with crude oil storage for lease have been using higher demand to improve their contract terms such that when short-term contracts come up, terms are extended further. Crude storage customers have seen higher renewal rates since crude storage owners could utilize the storage themselves to take advantage of the contango markets. Most issuers prefer to have customers take the higher contract rates and sign up for the capacity.
From a credit perspective, these favorable dynamics are not expected to have a significant impact on midstream issuers. Issuers with crude storage tend to be fairly diversified entities and, therefore, the positive changes for crude storage are only expected to provide a minor boost to overall cash flows.