Bulk Storage Terminals
Date April 2016
- On April 8, 2016, crude oil stockpiles reached a new high, following a quarter of the highest inventories on record
- Total gasoline stocks were 5.2 percent higher at the beginning of April than the same period last year, after falling from record highs in February
- Industry revenues: $524.3 billion (gasoline and petroleum)
- Major product stored: Motor gasoline, No. 2 distillate fuel oil, crude oil, jet fuel, residual fuel oil, lubricating oil, liquefied petroleum gases, chemicals, LNG, vegetable oils, biofuels
- Significant companies: Exxon Mobil Corp., Marathon Petroleum Corp., Valero Energy Corporation, Chevron Corporation, Royal Dutch Shell PLC, Vopak, Oiltanking, Kinder Morgan, NuStar, Buckeye, CLH, International-Matex Tank Terminals (IMTT), CIM, Magellan, Odfjell, Intercontinental Terminal Company, LBC Tank Terminals
- Market share of top: The five largest gasoline and petroleum bulk stations in the U.S. generate approximately 40 percent of revenue
- Recent sales trends: The collapse of oil prices has spurred stockpiling, driving significant revenue growth in 2015. However, profits of operators who take ownership of stored petroleum liquids were hurt by the same market dynamics
High barriers to entry temper new market entrants: Terminals require a large upfront capital investment, and the break-event 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.
Current stockpiles are massive: Averaging 466 million barrels, U.S. commercial crude oil stocks rose 22 percent in 2015 over the prior year. Inventories of motor gasoline rose two percent relative to 2014 to an average of 225 million barrels. In contrast, distillate fuel oil rose 13 percent in 2015, averaging 139 million barrels. Similarly, average jet fuel stocks rose seven percent relative to 2014. Overall, total inventories exclusive of the Strategic Petroleum Reserve rose 13 percent, averaging 1.262 billion barrels.
Contango Fueling Demand: Current storage conditions, as well as expectations for further builds through 2016, are affecting U.S. crude oil prices by placing downward price pressure on near-term futures contracts. When inventories are high and building, costs to store crude oil generally increase. In futures markets, where commodities may be purchased for specific delivery times in future months, the high value of storage often means long-term deliveries are priced higher than near-term deliveries, a situation known as contango.
As tanks fill, floating storage eyed as alterative: When crude oil front month futures prices reach large discounts to those contracts for delivery months or years in the future, market participants may store crude oil on waterborne vessels, also known as floating storage. By purchasing crude oil on the spot market, selling a longer-dated futures contract and chartering and manning a vessel, market participants can lock in a rate of return. Because of the costs associated with chartering and manning a ship, floating storage does not typically become economical until super contango is reached, when one-year forward prices trade at a premium of $10-12 per barrel. Traders earned billions of dollars from executing this strategy in 2009 and, in some markets, it’s looking viable again.
Export ban lifted: In December 2015, U.S. Congressional leaders agreed to lift the nation’s 40-year-old ban on oil exports. The repeal is unlikely to immediately impact crude prices given current elevated global storage levels, slowing of global trade and the expectation of Iranian exports reaching the market. However, when economics become favorable, terminals with seaborne access will benefit. While extensive networks of oil pipelines and storage tanks already stretch along the Gulf Coast, those oil ports, where nearly one third of U.S. refineries are located, are geared toward unloading crude from tankers rather than loading them. Thus, initially there would be some constrained capacity that restricts energy companies’ ability to ship crude to foreign buyers.
Demand for chemicals storage expected to increase: 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. Fed by cheap shale gas since the late 2000s, U.S. firms have made more money than their foreign rivals. The decline in oil prices has eroded some of that advantage, but oil remains about two and one-half times as expensive as natural gas on an energy content basis, which remains very favorable to ethylene and polyethylene production in the U.S. These favorable production conditions will raise demand for bulk storage facilities along the Gulf Coast, where there is a high concentration of chemical production facilities.
Oil forecast mired in uncertainties: U.S. crude oil production averaged an estimated 9.4 million barrels per day in 2015, with forecasted production years averaging 8.7 million barrels per day in 2016 and 8.2 million barrels per day in 2017. Despite this anticipated decline in production, the U.S. Energy Information Administration (“EIA”) forecasts global oil inventories will grow by an average of 1.6 million barrels per day in 2016 and by 0.6 million barrels per day in 2017. The high level of inventory builds primarily arises from continued resilience from non-OPEC oil producers in the current low-price environment and as a result of a reduction in forecast global oil demand growth. Higher forecast inventory builds and slower market rebalancing contribute to more limited price recovery in 2017.
The expectation of continuing large inventory builds represents a major source of uncertainty in the price forecast, as the capacity of global oil storage to absorb builds of the forecast magnitude is unknown. If global storage capacity becomes stressed, the cost of storage will rise to reflect more expensive marginal storage options such as floating inventories on crude oil tankers. Additional uncertainty stems from the pace of global economic growth and its contribution to oil demand growth, and also from the responsiveness of oil producers to sustained low oil prices.