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Nearly 300 million barrels of available capacity

World could face 1 billion-barrel crude build

Spot crude discounts widen

Houston — The United States could face a dire crude oil storage crunch in the coming weeks and months with more than half of the nation's commercial crude capacity currently filled and volumes rapidly rising.

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The combination of a global crude demand crunch coupled with the continued flow of surplus supplies means that storage reserves should begin to fill up more quickly, possibly testing the limits of US crude storage capacity as early as this summer, according to industry observers.

Almost 300 million barrels of commercial crude oil storage remain in this country, according to the latest estimates from federal data. But the US is still churning out close to 13 million b/d of crude oil.

Those volumes are expected to decline, but not fast enough to prevent storage volumes from rapidly rising. The rest of the world is facing potential storage shortfalls as well, so it may be increasingly harder to ship excess crude barrels oversees in the weeks ahead.

Some pipelines and regional storage hubs already are feeling constrained, and more oil is going into storage in supertankers around the world.

The worst-case scenario is if global demand falls by about 20 million b/d or more from the coronavirus pandemic, and Saudi Arabia and Russia continue their pricing war after the implosion of the so-called OPEC+ group early in March. That could result in a supply-demand gap of 24 million b/d, said Ethan Bellamy, an energy analyst with Robert W. Baird & Co.

"My view is that it's much worse than people are expecting," Bellamy said. "With no changes to the status quo, we will fill storage in June or July depending on the rate of overall economic slowdown and OPEC+ positioning. If that happens, oil producers will be shutting in wells or giving oil away."

NYMEX WTI pricing could then further crater from about $20/b now down to the single digits, Bellamy said. Some spot markets already are pricing much lower. In the Permian Basin, Midland WTI was assessed by S&P Global Platts at just $13.51/b Friday, as price discounts have widened because of reduced storage space, and lower refinery demand.

Those spot price discounts also reflect the widening contango structure for crude. NYMEX front-month May crude futures settled at a roughly $15/b discount to the 12th-month contract Monday.

Texas and OPEC+

Texas energy regulators warned this weekend that some producers started receiving letters from pipeline operators asking them to voluntarily scale back on their crude outputs because they're rapidly running out of storage, said Ryan Sitton, a commissioner on the Texas Railroad Commission that oversees the oil sector.

Plains All American Pipeline, one of the top US crude shippers, is among those asking producers to cut back as supplies begin to overwhelm capacity, according to a Bloomberg report. Plains could not be reached for comment.

That's why Texas regulators and the White House are talking to Saudi Arabia and Russia about working about a broader OPEC+ agreement for everyone to reduce production. President Trump spoke with Russian President Vladimir Putin on Monday.

Sitton has championed the three-person Texas Railroad Commission requiring producers to cut back for the first time in almost 50 years, but the other commissioners hadn't jumped on board.

Still, last week, Chairman Wayne Christian said he's open minded if OPEC and Russia are on board.

"Any action taken by Texas must be done in lockstep with other oil producing states and nations, ensuring that they cut production at similar times and in similar amounts," he wrote in a statement.

Rising tide

In the months ahead, S&P Global Platts Analytics projects massive, global crude stock builds of as little as 500 million barrels to as much as a 1 billion-barrel build in its worst-case scenario.

While global oil demand may fall by close to 20 million b/d in the short term, Platts Analytics currently forecasts overall 2020 demand to be down by about 4.5 million b/d, although those estimates could keep rising depending on how long much of the world remains locked down from the pandemic.

US crude stocks jumped by 1.6 million barrels last week, according to US Energy Information Administration data, but that's considered just a small sign of what's to come in the weeks and months ahead so long as crude prices remain deeply depressed.

Crude inventories have now jumped for nine straight weeks up to their highest levels since July.

Analysts polled by Platts were looking for crude stocks to build by 4.6 million barrels for the week ending March 27.

Not panicking yet

Robert Merriam, director of the office of petroleum and biofuels statistics at the EIA, said he doesn't see US crude storage running out any time soon, noting that current stockpiles are still just more than half full.

"We could double our oil before it starts flowing over the tops," Merriam said, arguing that now is not the time to panic.

However, US storage may not be able to accommodate current production volumes for a very extended period of time, he said. US supplies would have to fall to slow the pace of storage filling up.

North American producers have slashed their capital spending budgets by about 30% on average this month and, last week, the US drilling rig count saw its biggest single-week drop since the final week of 2015, according to rig data provider Enverus.

But there's an extended lag time of several weeks before declines in drilling and completions activities translate into meaningful production declines.

And now it looks like the US Strategic Petroleum Reserve won't provide much assistance. The federal government has suspended plans to purchase 77 million barrels of cheap oil for the nation's reserve after funding for the idea was stripped from the federal coronavirus stimulus package that Congress approved Friday.