“My view is people need to kind of settle in for a while.”
Exxon (NYSE: XOM) CEO Rex Tillerson issued this calm guidance to investors and oil drillers this week, as his company announced it was shifting gears for spending this year.
Like much of the industry, Exxon has felt pain on the balance sheet and in the markets because of the drop in oil prices over the last seven months or so.
However, as companies cut spending, many of them claim they will boost production, which is setting up the U.S. oil market for a huge crisis — one that could be even worse than the bear market at its height in December.
According to Tillerson, “There’s a lot of supply out there. And I don’t see a particularly healthy world economy.” He’s right, but he’s still overly optimistic.
Exxon will cut spending by 12% in 2015 but somehow increase production by 7%.
Other oil majors such as BP, Chevron, and Royal Dutch Shell have made similar claims, although Shell and BP are cutting CAPEX in a more drastic way.
And yet they’ll all raise production…
I’m less than convinced. In fact, I’m almost certain they’re forgetting about one big problem that’s brewing while demand continues to flounder.
No More Storage Capacity
Before the numbers were released earlier this week, analysts anticipated that U.S. crude stocks were going to rise by 4.2 million barrels.
So it must have been a shock when it was announced that stocks rose — in just a week, mind you — by 10.3 million barrels. That’s nearly three times the expectation.
In the U.S., companies have been importing and producing more than 1 million barrels of oil per day that doesn’t get refined or sold. It’s simply stored in massive tankers like the ones in the image below.
More oil has been put into storage as prices have fallen and the market has entered contango — meaning oil prices will be better in a few months and it is more profitable to store oil and sell it later.
But what’s happening now is that U.S. storage capacity is getting dangerously close to full.
With this week’s increase, the total is now at 444.37 million barrels of our roughly 600-million-barrel capacity.
The oil storage hub in Cushing, Oklahoma is at nearly 70% of its capacity, with more barrels in storage now than in the last 80 years. And as these tanks fill up, the industry is going to reach a crucial oversupply point.
Experts call it “tank tops,” and it happens when tanks are full. Once the tanks hit this stage, producers will have to stop drilling or sell all of the oil they produce — a grim prospect with demand so low.
This means that per-barrel prices will likely collapse, with some analysts — including Citibank’s commodities head Ed Morse — predicting $20 per barrel, while others suggest worse.
I don’t know exactly how far oil could fall, but I do know how investors can take advantage if it does.
Our analysts have traveled the world over, dedicated to finding the best and most profitable investments in the global energy markets. All you have to do to join our Energy and Capital investment community is sign up for the daily newsletter below.
Supply and Demand Shift
One analyst, Hillary Stephenson of Genscape, claims that Cushing could be full by mid-April.
Cushing is home to 14% of all storage capacity in the U.S., so any blockage there would initiate panic among producers trying to store unmarketable production.
As tanks fill up, oil prices will drop, causing more harm to shares of drillers on the open market and their investors.
However, when oil is oversupplied and storage is in high demand, that means the price to store oil is going to go up as space becomes limited.
If investors position themselves to take advantage of rising storage premiums, they could see modest gains in the next few months.
Some of my readers are invested in companies with storage capacity in the underserved PADD II region, where the Midwest and Northern Prairie states store their oil.
The chart below shows how close these tanks are to being full…
Once capacity gets absorbed, many companies will be paying even more just to keep their oil protected from low prices.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
Keith’s keen trading acumen and investment research also extend all the way into the complex biotech sector, where he and his readers take advantage of the newest and most groundbreaking medical therapies being developed by nearly 1,000 biotech companies. His network includes hundreds of experts, from M.D.s and Ph.D.s to lab scientists grinding out the latest medical technology and treatments. You can join his vast investment community and target the most profitable biotech stocks in Keith’s Topline Trader advisory newsletter.
