this post relates data storage economics to oil storage. the fundamentals are different but a negative oil price made me think a lot about storage economics.
the “you will never see this again” moment happened last Monday when the front month contract on WTI oil went NEGATIVE. People would pay you to take delivery of oil.* (*if you had storage capacity to take delivery in Cushing, Oklahoma on Tuesday) It prompted a much deeper dive into the economics of storing Oil.
I never once wondered about the economics of Oil storage before last Monday. I have a working knowledge of oil price fundamentals thanks to years of reading investment research: Supply, demand, spare capacity. Daily average usage is ~91 Mill barrels of Oil/day. Futures curves can be in Contango or Backwardation, horizontal drilling has massively changed decline rates and increased production. etc, etc.
I even know what 3:2:1 crack spreads are but only because my friend Scott Brown used to ask new sales people that question during role-plays simply to haze them. He wanted to make sure they realized no matter how much they had studied the topic – they were newbies – tourists in the energy markets, not really ready to talk to serious investors. Trust me – a fool proof question to freak out a sales trainee is “whats the current 3.2.1 crack spread?”
But along with a large % of the population, I was shocked when the price of WTI contract for May delivery went to negative -$38 on Monday.
COTW #1 (Chart of the Week) Negative oil price
How can the price go negative? There is an enormous glut of crude thanks to both a supply shock due (Saudi and Russian production increases) and demand collapse due to coronavirus pandemic. On Monday – Buyers vanished and oil markets broke down owing to lack of storage space.
“You mean they will give you money to take the oil? I could buy a barrel of oil, burn it and then sell the barrel itself for $40 easy.”
– My brother-in-law, Monday April 2020 – 2:30 pm. (actual quote)
So, you have to take delivery of it, then store it?
Futures contracts are settled by physical settlement. Delivery. Most traders do not want physical deliver so will roll over futures contracts to switch from the front month contract that is close to expiration to another contract in a further-out month. However, somebody eventually has to take delivery – exit financial parties / enter real Industry participants.
How much does it cost to store?
Good question. The answer – it depends.
- Where is it located?
- Can you secure it?
- When do you need to access it?
- How much does it cost to move it?
- How close are you to full capacity? (scarcity value)
POTW #1 (Picture of the Week) – Salt Caverns = Cheap and Deep Storage costs historically about $3.50 per barrel in capital costs.
The cheapest place to store oil is where you don’t expect to access it for a while. The Strategic Petroleum Reserves are the largest stockpile and cheapest storage. We mostly use salt caverns believe it or not.
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• Why is crude oil stored in salt domes and not in tanks? Salt domes storage has advantages in cost, security, environmental risk, and maintenance. Salt formations offer the lowest cost, most environmentally secure way to store crude oil for long periods of time. Stockpiling oil in artificially-created caverns deep within the rock-hard salt costs historically about $3.50 per barrel in capital costs.
COTW #2 and POTW #2: Storage capacity and Tanks at Cushing OK. Storing oil in above ground tanks, by comparison, can cost $15 to $18 per barrel – or at least five times the expense.
A key part of the energy infrastructure is normal crude and refined product storage. Above ground storage tank costs are more expensive but more convenient. These costs are built into the cost of finished products and don’t usually vary far outside normal operating range. (until now)
POTW #2 & 3: Burst Capacity = Tankers Floating at Sea. Costs just went up ~15x in last month!
When regular storage fills up – – tankers provide burst capacity. Hundreds of millions of barrels have gushed into storage facilities worldwide. Traders have hired vessels just to anchor them and fill them with the excess oil. A record 160 million barrels is sitting in tankers around the world. Oil tankers carrying enough crude to satisfy 20% of the world’s consumption are gathered off California’s coast..highest volume of crude to ever float off the West Coast..
You know where this is going: This storage is more expensive still.
Right now, a Ship can earn more Cash in ~60 days than in 5 years of normal operations:
How much Storage capacity is left and can we add more?
Long term storage (SPR) is full. Regular above ground tanks are almost full and can easily be full in next 2 weeks. Burst capacity in floating tankers is at ~98% utilization at record high amount of crude. We can apparently convert smaller ships and older ships into service but will not be quick. So that leaves…..Converting pipelines used for transferring crude into storage!
How does Oil storage relate to Data Storage? Data is the new Oil revisited.
Just like oil during the pandemic, data storage volumes are going higher. And like Oil – data storage costs need to be measured, considered and managed.
Unlike Oil storage, we can and are adding data storage capacity every day. And unlike oil, technology is improving rapidly and the right data storage technology provides increasing efficiencies (more for less).
Capacity management and planning are a core part of IT management. And modern storage platforms and consumption models can provide predictability regardless of operating model (traditional, hybrid, Cloud, SaaS) The goal is to make Infrastructure invisible to the user – but pricing transparent & predictable for operators.
Infrastructure is invisible…but 2 weeks to Go until they run out of oil storage. Otherwise a new extreme shock in oil price in May.
At least there is some consumer upside…
Notes from the Field 