Oil market update: The world is running out of places to store all of its crude.

The World Is Running Out of Places to Store All of Its Oil

The World Is Running Out of Places to Store All of Its Oil

Moneybox
A blog about business and economics.
March 5 2015 3:38 PM

The World Is Running Out of Places to Store All of Its Oil

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All full. Sorry.

Photo by Frank Perry/AFP/Getty Images

The world is now pumping so much more oil than it needs that corporations are apparently running out of space to store the stuff. If the globe were a giant gas tank, its meter would be getting close to full. Here's how the Wall Street Journal sums up the situation in numbers today:

U.S. crude-oil supplies are at their highest level in more 80 years, according to data from the Energy Information Administration, equal to nearly 70% of the nation’s storage capacity. A key U.S. storage hub in Cushing, Okla., is expected to hit maximum capacity this spring. While estimates are rough, Citigroup Inc. believes European commercial crude storage could be more than 90% full, and inventories in South Korea, South Africa and Japan could be at more than 80% of capacity.
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The main cause here, again, is that oil production is still outstripping demand. But the problem is being exacerbated because the crude market has entered what's known as contango, which is when buyers are willing to pay more for oil delivered a few months from now (when supplies might finally drop and bring up prices) than they are for oil delivered today. Investors have responded by snapping up cheap crude now, putting it in storage, and locking in futures contracts that amount to guaranteed money. (Good news for them: There's even talk of the market hitting "super contango.") As a result of all this activity, the Journal reports that the cost of storage itself is rising, which is leading to the creation of the brand new trade in oil storage futures. Weird things are happening.

As storage space becomes ever more scarce, it could ultimately force prices lower, as drillers find themselves with fewer customers who have the capacity to hold onto the crude. That's one reason Citibank analysts have suggested the cost of a barrel could potentially drop to around $20. That said, if the situation gets bad enough, drillers may finally just choose to leave their oil in the ground. Also, companies are presently building more storage capacity, which could alleviate the problem a bit.

But anyway, the main takeaway here is: If you happen to have a large backyard swimming pool, or just a really big ditch, put oil in it. Lots of oil. It's a sure bet. No, no need to thank me for the advice. That's just what we're here for at Moneybox. 

Jordan Weissmann is Slate’s senior business and economics correspondent.