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The US is Running Out of Oil Storage?

At – for more than 7 years – we’ve been skeptical of the all-too-easy-to-digest headlines that the media often likes to use to oversimplify really complex market situations. The intricacies of macro economics can’t be overstated. Individual countries have exceptionally complex economies and then the inter relationships between countries’ economies add layers of complexity to an already complex system.

Einstein noted we need to “make things as simple as possible, but no simpler”. It’s the last part of that statement that can be exceptionally tricky when you browse market headlines. Let’s dive into a timely example.

The Oil Price Sky is Falling – Right?

A popular narrative gaining steam is related to a question high on investor’s minds these days — where’s the price of oil going? The question is pertinent given how big an impact the commodity has on macro economics. The decline in oil’s price acts like a tax cut to consumers and benefits net importers, while simultaneously hurting net exporters and those within the industry.

It has been one of the most popular topics in the investing community for the past 5 months (the data we have from our suite of digital finance properties definitely underscores this point), but as oil has consolidated in a range bound state for the better part of six weeks, the guessing game is as intense as ever as to which way it might break-out, if any. The bears seem to be trumpeting stats related to US oil storage filling up, but let’s shake this assumption, and by doing so hopefully add some much needed context to the discussion.

The Truth

I came across a piece that nicely balanced this narrative from an off-the-beaten-path source that dissects the narrative that is currently popular amongst many a widely distributed source. The narrative goes like this:

US Running out of room to store oil; price collapse next?

In the ‘Balanced View’ piece, the site’s editor makes some great counter points. Here’s a synopsis:

  • ‘The oil price is going to collapse given storage concerns’ point #1: the storage at the Cushing, Oklahoma facilities (where the price of WTI is set for the New York Mercantile Exchange) are at 80 year highs!
  • Balanced view, counter point #1: context to how full any storage facility is is required to have a thoughtful discussion (in the Energy Trends piece, the author aptly points out: “You could be at the highest levels in 80 years and only 10% full”)
  • ‘The oil price is going to collapse given storage concerns’ point #2: The EIA suggests the United States has been adding 1.4 million barrels per week at Cushing alone. (Yikes!)
  • Balanced View, counter point #2: perhaps, but “The EIA also reports that across the U.S., total crude oil working storage capacity was 521 million barrels as of last September, and as of March 6, approximately 320 million barrels of that volume was being used” and “with 200 million barrels still available, oil producers could continue to add a million barrels a week for nearly 4 years before crude oil storage is actually full.

Let me add something to counter point #2, as there can be quibbling about storage figures. So, let’s talk in the context of margin of safety. Even if for whatever reasons, the 4-year figure was twice as long as reality, that’s still 2 years worth of capacity at the current rate of net national storage increase.

The Bottom Line

The bottom line is and will remain to be this: you need to dig beyond the headline any time you’re making any investment-related decision. It is our job at to help you do that and to add requisite context and fidelity to narratives and stories that, on the surface, can appear easily digestable, but upon further analysis, likely require more research to paint a better picture. Together, we’ll make things “as simple as possible, BUT no simpler.”

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