fuel tanks

Bulk Storage Terminals

Industry Insight

Date May 2018

Gordon Brothers by the numbers

Synopsis

Current trends

  • As of the end of April 2018, crude oil stockpiles were down 9.6% from the same period last year
  • Total gasoline stocks were 1.3% percent lower at the end of April 2018 than the same period last year, after falling 5.5% from the most recent high in February

 

Projected Values

 

crude-oil-stocks

 

High barriers to entry temper new market entrants: Terminals require a large upfront capital investment, and the break-even point is high depending upon property costs, the variety of tank sizes, and similar factors. After making this upfront investment, the facility can expect to realize high operating margins, which reflects the capital-intensive nature of the business. Additional tankage tends to generate high margins due to small incremental operating costs; the main cost is the investment in tanks, pumps, roads, pipelines, and loading racks. Liquefied natural gas storage is the most expensive and oil storage is the least expensive to construct. Provided facilities are maintained by competent operators, they can generate long-term predictable cash flows.
 

Dependence on chemical and petroleum markets: Given that the industry serves as a conduit between petroleum refiners and markets further downstream, the industry’s performance is intimately linked to the supply of and demand for petroleum and petroleum products, which account for nearly 70 percent of industry revenue. Thus, industry performance experienced a strong increase between 2010 and 2012 in conjunction with a rise in oil prices. Conversely, industry performance fell sharply between 2013 and 2016 primarily due to collapsing oil prices attributable to strong North American oil production and weak global demand. Industry revenue recovered in 2017 after a rebound in crude oil prices and, as of late April 2018, oil was $67.98 per barrel, an increase of 30 percent from $52.16 in 2017. Barclays’ head of energy commodities research sees international benchmark Brent crude averaging $68 a barrel in the second quarter of 2018 but sees crude prices falling into correction in the back half of the year. Geopolitical tension in Syria, Yemen, and Iran will keep oil prices elevated over the short term, but a correction is projected for later this year, which may negatively impact the industry.
 

New capacity not sufficient: Refineries represent the main upstream suppliers of petroleum products for the industry. Domestic refinery expansion has not grown in recent years. When combined with the growth of the U.S. economy and a lack of refinery expansion, bulk storage capacity for petroleum products has grown closer to full capacity. Many oil companies are concentrating on developing refining capacity abroad instead of developing capacity in the United States. While this increases the need for bulk storage tanks at oil exporting ports, it decreases the need for more numerous bulk storage tanks required to store various refined petroleum products.
 

Crude oil inventory stability: Large crude oil inventory declines in the United States during the past year contributed to the 267 million barrel decline in total petroleum inventories since January 2017 in countries in the Organization for Economic Cooperation and Development (OECD). However, the Energy Information Administration (EIA) forecasts commercial crude oil and other liquids inventories to experience modest increases over the next two years, with U.S. inventories increasing from 1,232 million barrels in 2017 to 1,237 million barrels in 2018 and a further 33 million barrels during 2019. Similarly, EIA forecasts OECD commercial inventory to grow from 2,838 million barrels in 2017 to 2,864 million barrels in 2018 and 2,898 million barrels in 2019.
 

Construction markets and chemicals storage demand: U.S. companies make petrochemicals from natural gas-derived ethane rather than the petroleum-based naphtha used in much of the rest of the world. Industrial chemicals in the United States primarily consist of bulk petrochemicals, the performance of which ties closely to oil production. Chemical producers have realized great benefits from the continued growth of the construction market over the past several years. Construction companies’ use of chemicals continues to increase, subsequently increasing demand for their storage.
 

Growth in oil production forecast: U.S. crude oil production averaged an estimated 9.3 million barrels per day in 2017, with forecasted production over the next two years averaging 10.7 million barrels per day in 2018 and 11.4 million barrels per day in 2019. However, while oil production should continue to grow, growth in oil inventories likely will remain restricted due to an increase in demand. Nonetheless, petroleum stocks will likely remain high, particularly once prices move high enough to entice more oil production.