Will full storage tanks crash the price of oil? A group of analysts is acknowledging the possibility of storage tanks soon becoming full. Although storage capacity is not estimated with any accuracy and numbers change frequently, the consolidation by the industry has improved the efficiency of inventory management, and consequently, of their reports.
According to vendors and providers of storage tank services, such as heartlandtankservices.com, steel storage tanks are the cornerstone of many industries in the United States. From manufacturing to agriculture, to sanitation to the oil industry, storage tanks are indispensable. So much so, that for the last couple of years, U.S. private crude oil inventories are higher than they’ve ever been.
During 1998, storage tanks were described as full, due to some hundreds of millions of barrels missing, which apparently meant they couldn’t be accounted for in data. But this time around, with the suggestion of storage tanks again becoming full, the figure reflects accuracy. Although worldwide, storage capacity has increased, the world is nearing full tanks again.
OECD inventories have been relatively high since the financial crisis of the ‘08. However, analysts recently revealed data that shows figures well above historical highs the recent months. In over three decades, private crude oil inventories never passed 400 million barrels, and today, they are approaching a close 500.
The best way to judge the surplus of storage levels is to look at its effect in the market. The difference between the current price and what people might be willing to pay in the future is known as contango, which implies a positive number, and is called backwardation, if negative. A strong contago means buying oil now requires an anticipation of future prices will be high enough to cover holding costs.
But will it be? These costs include the interest rate and storage costs, the biggest components and the fastest growing factors in the filling of still existing storage tanks. Thus, an increase in contango is a sign that due to the current surplus could lead to inventory holders scrambling for high-cost storage. As for the price of oil, it seems the market hasn’t decided yet.