With global lockdowns already sharply reducing demand for oil, a lack of storage would weigh further on already depressed prices, leaving producers with few financial or physical alternatives but to turn off the taps.
The system still has the capacity to continue absorbing crude at the current rate for a few more weeks, and longer if the inflow is slowed by production cuts from OPEC and its allies as well as U.S. and Canadian producers.
But a more severe constraint is likely to come from the refined fuels system, where storage capacity is lower and logistics constraints are tougher.
U.S. Energy Information Administration data on working storage capacity covers crude rather than refined products – where storage is split between refiners, blenders, wholesalers, retailers and end users.
But once fuel storage is full, refineries will have no choice but to cut back crude processing, which will cause crude stocks to back up even more rapidly.
Working storage capacity for crude oil at refineries and tank farms amounted to 653 million barrels at the end of September 2019, the latest data available, according to the EIA.
Net stocks of crude held at refineries and tank farms amounted to 375 million barrels at the end of last week, implying storage facilities were about 57% full (“Weekly petroleum status report”, EIA, April 16).
Storage utilisation has climbed from 50% four weeks ago, before the economy started to go into lockdown, but it remains well below the recent peak of 68% set back in March 2017 ().
There is still around 280 million barrels of unused storage capacity available, down from 328 million barrels four weeks ago, but more than the 175 million barrels available at the tightest point in March 2015.
However, crude inventories have been rising at an average of 16 million barrels per week over the last three weeks. If tank farms continue to fill at this rate, spare capacity will fall back to its recent lows by the end of May.
U.S. petroleum markets, refining and storage are organised regionally rather than nationally, with limited transfer capacity and flexibility between regions.
Most crude storage capacity is concentrated on the Gulf Coast and in the Midwest, which together account for 83% of the total, with more limited volumes on the East and West Coasts and in the Rocky Mountain region.
Crude storage utilisation in the Gulf Coast refining region is at 55%, up from 50% four weeks ago, though still well below its recent peak of 72%.
In the Midwest refining region storage utilisation is at 60%, up from 48% four weeks earlier, but still well below the recent peak of 80%.
There is still 166 million barrels of spare capacity in the Gulf Coast, compared with a recent low of just 90 million, and 69 million barrels in the Midwest, compared with a recent low of just 27 million.
Working storage capacity is defined as that part of the tank from which crude can readily be withdrawn; it excludes tank bottoms, where pumping cannot effectively remove the oil.
Even so, working storage capacity cannot be filled 100%; some must remain available for receiving new deliveries, tank-to-tank transfers, blending, and other routine operations.
Operational requirements suggest the tank system could become effectively full well before working capacity reached 100% (“Weekly U.S. and regional crude oil stocks and working storage capacity”, EIA, April 8).
But experience has shown the system can operate with relatively high storage utilisation rates. The system managed to cope with a nationwide average of 69% (in March 2017) and with regional averages as high as 80% in the Midwest (March 2015) and 72% on the Gulf Coast (Feb 2017).
If the global oil market remains oversupplied into June and July, crude and products storage could start to become a more significant problem.
Cash prices for crude and fuels, as well as near-dated futures contracts, are trading at big discounts to compel those without firm buyers or access to storage in June and beyond to slow down their wells and refining capacity.