According to a March 16th Energy Policy report from research firm FBR, the worries about U.S. crude oil storage capacity leading to significantly higher crude prices near-term are overblown.
FBR analysts Benjamin Salisbury and colleagues explain their argument: “As the market continues to focus on the potential for U.S. oil production to overwhelm existing storage capacity, we emphasize that several opportunities to avoid or alleviate a price blowout exist, including oil swaps and exchanges with Mexico. As a result, we would expect prices to rebound quickly, even in the face of storage-related price weakness.”
Crude oil storage crisis likely to be temporary
It’s been all over the news the last week or so that U.S. crude stocks may soon reach storage capacity limits, and many have opined that this will lead to further declines in oil prices. Sources say storage at Cushing depot is currently more than 51.5 million barrels, and the build is expected to continue.
Salisbury and colleagues argue that even if the oil storage limit is reached, the oversupply would probably not last ling as refinery demand typically increases by a million barrels per day between March and May as facilities complete maintenance and begin to build into the summer driving season. Moreover, the U.S. oil rig count has dropped an average of 48 rigs per week so far this year, which should start to lower production by this summer.
The FBR team also points out that “such a short-term dislocation would prove a powerful catalyst for the Department of Commerce (DOC) to approve exports to Mexico in some form.”
Oil exports to Mexico a realistic possibility
The FBR report also notes that the U.S. crude oil “export ban” is really a patchwork of laws that establish a number of prohibitions and licensing procedures for exporting oil. These laws provide for three types of exemptions for crude oil. The first type is known as a “swap,” and has three requirements: the oil cannot be marketed in the U.S., an equal or greater quantity and quality is imported, and contracts can be terminated given a U.S. supply disruption. Of note, a swap has not yet occurred. The second type is an “exchange,” which is an export to an adjacent country for convenience or efficiency of transport. These transactions require the import of “similar quantities of oil” and have happened before. Third, the president can declare that oil exports are in the national interest by certifying that exports will not decrease the quantity or quality of crude available in the U.S. or boost reliance on imports.