The largest oil storage facility in the US, located in Cushing, Oklahoma, may reach full capacity as early as April 1, according to several analysts. This should mean cheaper gas this summer. But it could also mean some trouble.
By Vikram Rangala
Wednesday, March 25, 2015
It's always complicated with oil, and this story of pumping into the glut involves Iran, Saudi Arabia, and a civil war which has probably already started in Yemen. It is between two sides, one Sunni, one Shi'a, backed by, wait for it, Iran and Saudi Arabia. But first, here are some key things to know about the US supply glut.
TWO KINDS OF OIL
The United States is closer than ever in history to running out of normal storage capacity for oil. The US has more reserves than at any time since the Great Depression, when there was little demand but oil fields were kept active as part of the New Deal. One problem is, US tanks are full of US light, sweet crude. There are two major kinds of crude oil: light sweet and heavy sour. The US mostly produces the former. The problem is, most US refineries are built to refine heavy, sour crude. We make one kind and refine and use the other kind.
Why? Most of those refineries were built when the US was a net oil importer. And much of those imports was heavy sour crude from Mexico, the Middle East, Canada, and elsewhere. It is easy to refine heavy sour into fuel oils, but for more pure products like gasoline and jet fuel it helps if you start with light sweet. The US has some light sweet refining capacity, but it invested more heavily in the complex refineries needed to turn even the dirtiest petroleum into the cleanest of fuels.
Being able to accept oil from many countries, some with governments we didn't entirely like, was important for US foreign policy in the Cold War and afterwards. Dirty oil for the sometimes dirty business of managing complex geopolitical strategy.
TANKS VERY MUCH
So now that the US is producing so much more oil from shale, fracking, and deepwater wells, it can't refine it all. What's more, it's legally prohibited from exporting oil, something some energy firms are fighting to change. Others are saying that since building storage is cheap, refineries will simply build more tanks. Still others are saying there's actually another 20 million barrels of room.
Actually, the company that built most of the storage tanks in Cushing is saying the reported capacity is just "normal" capacity and there is another 3-5% "contingency" space. Considering the Cushing facility was started after the Arab oil embargo and can hold enough to fill half the cars in America, that's some remarkable planning ahead.
While the US may still have storage room, Iran has stockpiles both onshore and in supertankers all along its coast. As I've written before, a nuclear deal will almost certainly include a lifting of sanctions, which would allow Iran to drop all that heavy, sour crude onto the already depressed world market.
DEPRESSED AND DEPRESSING
Will the profits help it pay to help its allies in Yemen? Possibly. And oil sold at the same world price would help the Saudis finance the other side. And the US, which may well find some Iranian heavy sour mixed into its imports soon, will be watching to see whether ISIS and Al Qaeda exploit the chaos in Yemen as they have in Iraq, Libya, and Syria. Washington considers President Abd-Rabbu Mansour Hadi an ally, but recently withdrew 100 counter-terrorism personnel from Aden.
The US may not need foreign oil the way it used to, but oil is a lubricant, if you'll forgive me, in keeping stable relations with both allies like the Saudis and adversaries like Iran, both of whom behead and flog criminals, oppress women, and are believed to fund terrorist organizations.
We'll probably enjoy some benefits in the US if oil prices take another plunge or two this year amid a rising dollar, Iranian exports, and an unprecedented oversupply. Cheap gas means road trips (maybe to Cushing, OK, population 2000) and cheap jet fuel means even our flights to Europe to shop for bargains will be cheap. But the hidden costs will be all around us.
For oil traders, simple bearishness may not be the best strategy in a complicated situation, despite the obvious supply glut. Oil looks likely to drop, but how it goes down is anybody's guess. The one sure thing is volatility in the markets and, sadly, violence in the world. It's a good time to trust the price movement and little else. In a market so full of conflicting agendas, the trend may be our only friend.
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