The following table highlights the current estimated storage economics for several key US crude oils and Canadian heavy crude. The calculations were based on yesterday’s (3/2) closing prices. Some of the main assumptions used in the calculations:
- The analysis uses $0.65/bbl per month storage costs. Storage costs have been talked at as high as $1/bbl in the market last week but I have not confirmed that.
- For West Canadian Select storage in Cushing I used the Flanagan South Pipeline option of free storage for the 1st six months and then $1/bbl thereafter (heavy crude oil needs heat) plus a $0.25/bbl re-entry fee back into the pipeline. For WCS storage in the Gulf I assumed $1/bbl throughout the storage period.
- Cost of Money – 1 year Libor rate – 0.67%
The combination of storage costs starting to increase as each layer of available storage gets filled coupled with the forward curve contango narrowing yesterday resulted in the economics of storing crude oil in the US becoming less economical compared to the last month or so. Some of the main conclusions for the analysis:
- I did not include any international crudes as the contango for Brent is just not wide enough and the cost of floating storage is too high to economically justify entering into new longer term storage trades.
- Storing WCS in Cushing as part of the Flanagan South Pipeline option is clearly the most economical storage trade. This has already resulted in a fair amount of Canadian crude being put into storage trades in Cushing already.
- Storing WTI at Midland and then moving it to Cushing for delivery against the Nymex contract is more economical than storing WTI in Cushing. The reason is the WTI Midland discount to WTI Cushing is enough to offset the pipeline cost of moving WTI from Midland to Cushing (to the extent that pipeline capacity is available).
- Storing other grades like LLS, Mars and WCS in the Gulf are marginal trades at best based on the current assumptions used. Oil is being stored in the Gulf. Since the end of last year over 15 million barrels of crude oil has already been stored in the Gulf. Part of that is likely operational and some is probably the result of storage trades that may have been entered into when the economics were a bit better for some of the aforementioned grades.
- Clearly storage capacity is getting bid up as storage facilities also try to take advantage of an opportunity. As storage cost rise the economics of storing most US grades will become marginal and/or unprofitable.
- As storage capacity continues to fill the WTI forward curve should widen. It normally does when oil is oversupplied. If it does not either imports will have to be reduced further or producers could face having to shut in oil if demand declines due to storage economics becoming unprofitable. I don’t think that will happen I still thing the forward curve will widen further.