Remember When We Were Running Out of Crude Oil Storage?

Given the amount of air time the crude oil storage situation received back in March and April, this might be a good time to revisit that situation. If you recall, there was a great amount of hand-wringing regarding the crude oil storage picture in the U.S. Inventories were high and they were continuing to rise. There were a great many articles like this one, which assured us the situation was dire: US running out of room to store oil; price collapse next?

“The U.S. has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months. For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Oklahoma, pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.”

Speculators began to bet that the price of oil was going to crash. Typical was this one at Seeking Alpha: Why Crude Oil Prices Will Have To Fall Hard.

I don’t usually write “I told you so” articles, but given the amount of flack I took from certain quarters, I am going to make an exception.

I gave a number of interview and wrote a number of articles explaining why these chicken little scenarios were wrong. On March 11th, I wrote Is the U.S. Running Out of Crude Oil Storage? I answered that question “No, despite the popular narrative that we keep hearing, the U.S is not running out of crude oil storage.” I went on to explain the reasons that crude oil inventories were rising, and then followed that article up with Crude Oil Inventories Should Peak Soon.

I explained that those who were betting on a crude oil price crash — and you may recall there were numerous prognosticators predicting exactly that — were not seeing the entire picture. At that time, oil was trading in the mid-$40s. I argued that it was likely to move up, not down as many had predicted.¬†One prominent analyst said that I didn’t seem to understand what was going on and that those calling for a price crash were correct.

So what happened?

This week broke a streak of 8 straight weeks of inventory declines after crude oil inventories peaked the last week of April. Crude oil prices moved above $60/bbl, but have since weakened back to the upper $50’s in response to the Greek monetary crisis. Those predicting $20/bbl or $30/bbl have gone mostly silent.

So what will happen next? Inventories are still historically high, and toward the end of summer demand will decline. But domestic supply is also showing signs of peaking in response to soft prices. While production is still rising, it is doing so at a slower pace, and inconsistently. We are now seeing weekly declines on a fairly regular basis. Inventories are likely to remain high for some time, but ultimately declines in domestic production will start to draw them back down. I think oil will likely continue to trade in a range of $50 to $70 as I have predicted for several months.

The situation in Greece is a wild card though. It has the potential to cause havoc in the financial markets, in which case oil prices will probably take a haircut. I will continue to monitor the situation closely, and hopefully next week I can start to report on the recently released BP Statistical Review.

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