“U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 8.2 million barrels from the previous week,” according to the March 20 weekly summary issued by the Energy Information Administration (EIA).
“At 466.7 million barrels, U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years,” the agency noted. The last time the U.S. had so much oil in storage was 1930.
Crunch time is expected sometime in May. But John Felmy, the American Petroleum Institute’s (API) chief economist, told CNSNews.com that it’s still “too soon to tell” whether the glut of oil will completely fill the nation’s working storage capacity, “which most estimates put at 520 million barrels."
“There’s no question that crude oil production is up significantly, but so is the capacity to store it,” he noted, adding that the Department of Energy counts extra “contingency space, which could be used but generally is not,” in case oil inventories continue to rise.
“It’s certainly possible that we would have to use contingency space,” Felmy told CNSNews.com.
Inventories at a major oil hub in Cushing, Oklahoma are at a record high after increasing for 15 consecutive weeks, according to a March 23 report by EIA.
That’s due in part to two new pipelines: the 690-mile Pony Express Pipeline, which has been transporting oil pumped from the Bakken and Powder River oil fields in Wyoming since last October; and the Flanagan South Pipeline Project, a 593-mile pipeline that started shipping crude oil from central Illinois to Cushing in December.
“The 70.8 million barrels of storage capacity in Cushing represent more than 60 percent of all crude oil working storage capacity in the Midwest… and about 19 percent of all commercial crude oil storage in the United States,” the EIA report stated.
On Thursday, U.S. crude was trading for $51.43 a barrel, up significantly from $44 a barrel in January, but still less than half of the $115 a barrel it was going for last June.
Felmy pointed out that although oil slated for May delivery is priced at $51 a barrel, the futures price is $7 a barrel higher for delivery in May 2016 and even higher the following year. So buyers have a financial incentive to “buy now, store and deliver in the future if the price differential is sufficient compared to the cost of storage,” he explained.
There are several other reasons why energy companies will keep pumping oil despite the current glut in supply, he told CNSNews.com.
One is that they could lose their expensive leases to the land if they do not drill. A second reason is that some of the smaller oil producers have cash-flow problems that force them to keep pumping and selling oil in order to make their loan payments.
Despite a record inventory that is straining the nation’s storage capacity, “the latest data we have, which was available at the end of 2014, does not show much of a slowdown” in production, Felmy noted.
That includes an anticipated 10 percent “surge” in Bakken oil production in June beyond the 1.2 million barrels North Dakota currently produces per day, according to the state Department of Mineral Resources.
Only 99 active rigs are still drilling in North Dakota, the nation’s number two oil producer, down from 198 last year. But energy companies there have two strong financial incentives to keep pumping.
About 125 new wells must start producing oil by the end of June in order to comply with a state mandate that drilling begin within a year of digging, Platts reports.
In addition, a two-year exemption from North Dakota’s 6.5 percent extraction tax for wells in production would be triggered if oil prices remain under $55 a barrel at the end of May.