The Oil Market Is Even Tighter Than The Positive Data Suggests
Oil inventory statistics increasingly suggest a tight oil market, but one nuance related to how oil in infrastructure is stored and reported could mean that the market is much tighter than currently estimated.
From March 2011 to December 2021, over 100 crude oil pipelines were completed as U.S. midstreamers undertook massive multi-year infrastructure projects on the premise of continued production growth. In lockstep with the build-out, crude oil stored in pipelines (known as line fill) grew by ~54 million barrels, up from ~75 million to ~ 129 million, and today accounting for ~ 30% of U.S. commercial crude oil stocks Figure 1. Unfortunately, declining oil prices in 2020, as well as in some years prior, caused producers to lower U.S. crude production; most of the infrastructure built to receive growing production now sits underutilized.
Figure 1: Pipeline Fill since 2011
Source: EIA, Working and Net Available Shell Storage Capacity Report
With soaring crude prices, falling stock levels, and lower overall domestic production, oil bulls are increasingly scrutinizing the availability of America’s commercial crude oil stockpiles, that include this number. The idea is simple – during the boom times, the U.S. overbuilt midstream infrastructure. Nevertheless, that infrastructure, such as pipelines and tank farms, require crude oil to operate (for pipelines it is critical). Since crude levels cannot fall below the operational threshold of tanks and since the pipes require oil to operate it is not actually commercially available (can’t be purchased to meet demand).
So why does that matter? Commodity prices move in relation to small changes in supply and demand balances. The response to very small changes allows the market to provide much needed supply before there is a crisis. At the same time, energy companies and governments use crude stockpiles to smooth out the price impacts of changes in supply and demand. Consequently, the level and availability of crude stocks play an essential role in helping the market set prices. Analysts that are investigating these storage data points like to compare current levels to historical levels to determine how tight supply is in relation to the past. Therein lies the problem. As a higher proportion of commercial stock is held in pipelines that crude is no longer available? And since the baseline storage level grew by ~54 million barrels since 2011, how do you correctly compare the present baseline with the past? The prevailing ideas among oil bulls are that stock levels must first be normalized for line fill growth, which is rarely done but would show that there is less crude available than people think.
The strategic petroleum reserve (SPR) provides another storage buffer against prices jumping but the US has recently been much more willing to sell supply out of the SPR for budget purposes and we now find it at its lowest level since 2002. There also remains a similar question with those volumes of how much is commercial useable (in 2018, three companies claimed that crude purchased from the U.S. SPR was contaminated).
Questions around the amount of stored crude available, and the specifics in that data, are becoming increasingly important as crude inventories continue to fall. It was easy to ignore these questions last several years but when we finally go to check we may realize not everything is there to the extent we thought. The multi-year downturn in commodities also means that fewer analysts are looking at these things, which may leave the world dangerously short much needed commodities in this coming decade.