U.S. Crude Oil Inventories Keep Rising

Following the path started in 2015, U.S. commercial crude oil inventories have continued to build in early 2016 and are nearing record highs. Stocks in the Gulf Coast reached 256 million barrels for the week ending February 19, while stocks at Cushing, Oklahoma, reached their highest recorded level of 65 million barrels for the week ending February 19 (Figure 1). U.S. commercial crude oil inventory builds at this time of year are not unusual, as planned maintenance at U.S. refiners typically reduces runs in January and February. However, with inventories already high after generally building over the past 18 months, this turnaround season could push storage capacity use to new highs. The result may be lower crude oil prices and higher price volatility in the near future.

According to the latest survey on working storage capacity, conducted at the end of September 2015, storage capacity in Petroleum Administration for Defense District 3 (PADD 3, or Gulf Coast) and Cushing was 302 million barrels and 73 million barrels, respectively. Using inventory levels from the latest Weekly Petroleum Status Report, utilization in PADD 3 and at Cushing was 84% and 89%, respectively. Since the end of September, however, it is likely that new storage capacity has been built, which would reduce overall utilization. Weekly crude oil inventory numbers also include pipeline fill and lease stocks (oil that has been produced but not yet entered into the supply chain), which are not included in the capacity survey estimates.
Current storage conditions, as well as expectations for further builds through 2016, are also affecting U.S. crude oil prices by putting downward price pressure on near-term futures contracts.

When inventories are high and building, costs to store crude oil generally increase. In futures markets, where commodities may be purchased for specific delivery times in future months, the high value of storage often means that long-term deliveries are priced higher than near-term deliveries, a situation known as contango. From February 1 to February 23, the prices for delivery of West Texas Intermediate crude oil (WTI) 13 months into the future exceeded prices for delivery one month into the future by an average of $10.44 per barrel (b). The comparable spread in the Brent futures market, the benchmark for the global waterborne crude oil market, averaged $7.54/b (Figure 2).

When crude oil front month futures prices reach large discounts to those contracts for delivery months or years in the future, market participants may store crude oil on waterborne vessels, also known as floating storage. By purchasing crude oil on the spot market, selling a longer-dated futures contract, and chartering and manning a vessel, market participants can lock in a rate of return. Because of the costs associated with chartering and manning a ship, floating storage does not typically become economical until contango reaches $10-$12/b.

Before the crude oil price decline that started in 2014, the last time there was a deep, persistent contango in the crude oil market was during the second half of 2008 and the first half of 2009, when the WTI 1st-13th month spread averaged -$16.83/b in January 2009. During that time, trade press reported a number of vessels being chartered for the specific purpose of floating storage.

There are a few differences in the crude oil market now compared with 2008 and 2009 that may explain why contango is not as great and floating storage is not as prominent. Since 2011, onshore storage capacity has grown on both an absolute basis and compared with refinery runs, likely mitigating some of the increase in storage costs. The switch in the global crude oil market from inventory draws to inventory builds was much larger in 2008 compared with 2014. From the first quarter to the fourth quarter in 2008, global stocks went from a draw of 1.38 million barrels per day (b/d) to a build of 2.38 million b/d, or a net change of 3.76 million b/d. In 2014, the net change was only 1.36 million b/d.

Furthermore, futures contract prices for delivery five years in the future are about $20/b lower compared with those for delivery five years in the future in December 2008. Longer-dated futures prices also dropped compared with this time last year at about the same rate as front month prices. This likely reflects the longer, sustained duration of inventory builds in the current market compared to 2008 and 2009 and the decline in long-run marginal production costs for producers in the United States compared to this time last year and 2008. The large overhang of global crude oil inventories and lower costs of production may be putting downward pressure on long-term market expectations for crude oil prices and narrowing time spreads.

U.S. average regular gasoline retail and diesel fuel prices increase slightly

The U.S. average regular gasoline retail price increased by one cent from the previous week to $1.73 per gallon on February 22, down 60 cents from the same time last year. The increase in the U.S. average was driven by the Midwest price, which increased nine cents to $1.61 per gallon. Prices in all other regions decreased, led by the West Coast price, which dropped eight cents to $2.14 per gallon. The East Coast and Rocky Mountain prices each declined two cents, to $1.73 per gallon, and $1.67 per gallon, respectively, while the Gulf Coast price decreased less than a penny to remain $1.53 per gallon.

The U.S. average diesel fuel price increased less than a penny from the previous week, remaining at $1.98 per gallon, down 92 cents from the same time last year. The Midwest and Gulf Coast prices each increased, the Midwest by one cent to $1.92 per gallon, and the Gulf Coast by two cents to $1.87 per gallon. The East Coast and West Coast prices each decreased by one cent to $2.06 per gallon and $2.18 per gallon, respectively.

Propane inventories fall

U.S. propane stocks decreased by 3.7 million barrels last week to 66.7 million barrels as of February 19, 2016, 7.5 million barrels (12.7%) higher than a year ago. Inventories in the Gulf Coast, Midwest, and East Coast decreased by 2.2 million barrels, 1.0 million barrels, and 0.6 million barrels, respectively. Rocky Mountain/West Coast inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 4.7% of total propane inventories.

Residential heating fuel prices decrease

As of February 22, 2016, residential heating oil prices averaged $2.09 per gallon 1 cent per gallon lower than last week and $1.09 per gallon lower than last year's price for the same week. The wholesale heating oil price this week averaged $1.10 per gallon, 3 cents per gallon lower than last week and $1.20 per gallon lower than a year ago.

Residential propane prices averaged $2.03 per gallon, almost 1 cent per gallon lower than last week and nearly 33 cents per gallon lower than one year ago. Wholesale propane prices averaged 47 cents per gallon, unchanged from last week and 28 cents per gallon lower than the price last year.