Oil Storage - No danger of filling

[dan_s]

The bears keep using the FEAR of high oil storage reports to justify lower oil price forecasts. Reality is that there is nothing to fear. Report below from Morgan Stanley. - Dan

Feature: US Storage to Build, But Tank Tops Unlikely
Headlines likely to remain bearish as structural problems persist, but a disaster scenario is unlikely.
Continued builds (on refinery turnarounds and higher production) in US crude stocks are likely to peak in May
at 115 mmb higher y/y - still well below tank tops. The build in US crude stocks is driven by North American
specific issues. Avoidance of a disaster scenario is dependent on the ability to access many outlets, made
possible by significant investment in midstream infrastructure over the last few years. US differentials will need
to support these efforts going forward (diffs can help indirectly access storage, and we see many options to
realign crude flows today), but these can occur with any WTI price. However, the trend in US data coupled with
oversupply fears may pressure pricing and structure more than is ultimately required.
Storage remains plentiful. We continue to hear confusion about US storage capacity, with many investors
comparing inconsistent figures. We forecast storage capacity by type and sub-region with our detailed NAm
balance. Tank farm working storage utilization could reach 73% in the US and 72% in PADDs 2-4, a record high,
but well below past peaks at Cushing (88%).
US storage tends to be more important for structure than pricing. We expect prompt structure to weaken
in each region as local storage levels build. Major dislocations are unlikely, but large prompt contangos could
briefly materialize around roll periods. Correlations between US storage and WTI price are weak. Global
dynamics, FX, and headlines should be a greater driver of the absolute WTI price. Diffs will be dictated by the
cost to clear markets.
Levers available beyond storage, at a price. How to avoid full US storage will largely be predicated on the
cost of alternative measures, but with an $8-13/bbl WTI-Brent range in 2015, that should be sufficient to clear
markets. Other levers include more exports to Canada, re-exporting Canadian crude, Jones Act, new splitters, rail
opportunities, and even displacing imports. However, many of the most important differentials are not WTI
linked. Key arbs include: 1) uncommitted tariffs in and out of Cushing (joint tariffs add complexity), 2) Syncrude
or AB lights vs. Brent, 3) USGC exports and Jones Act, 4) Bakken rail.
Without exports, long run differentials only deteriorate. Given Bakken opex and current field pricing, large
“blowouts” should be hard to realize. Plus, as long as imports remain, the US also has options. However, as
production grows, options become more expensive, implying a wider discount without export itself.