by Steve Gelsi

19-12-08 While cheap oil bites into the fortunes of crude production and refining, the oil storage business remains robust as energy players sock away plentiful crude to wait out the current multi-year trough until prices come back.
Storage of oil also offers a guaranteed return of $ 10 a barrel or more tied to the so-called "contango" structure of the futures market -- a condition where the expected price of oil in coming months trades higher than current prices. In another storage-based wrinkle to the 2008 oil sell-off, the lack of tank space for oil is pressuring some market players to sell contracts -- and thus depress prices further -- in order to avoid taking delivery of expensive-to-store oil.

Market observers say that condition has led to more losses in oil future prices with the expiration of January contracts looming. Either way you look at it, it's good to be in the oil storage business. Instead of selling oil at around $ 40 a barrel now, energy mavens have the option of locking in a futures contract for delivery for a two-third profit by storing the crude for a year, and pocketing the profit on delivery.
"Right now you can lock (the price) in for a year -- buy crude at $ 37, put it in storage, and forward sell at $ 55," said Dave Pursell, an analyst at Tudor Pickering Holt in Houston. "Anybody with storage, this is beautiful for them."

It's no wonder that storage levels at tank farms in Cushing, Oklahoma, are approaching the record level of 28 mm barrels set earlier, he said. Billed as the "Pipeline Crossroads of the World," Cushing serves as the delivery point for West Texas Intermediate Crude, the most heavily traded crude oil product on the futures exchange. Just recently, inventory levels at Cushing rose by about 20 %, or 4.7 mm barrels, an unusual rise because storage tends to fill up more in the spring ahead of the summer driving season.
Overall crude inventories in the US rose to 321 mm barrels, the highest in seven months. Even the largest announced production cut in OPEC in history failed to stop oil's retreat.

Energy companies with significant presence at Cushing include Enbridge, Plains All American Pipeline, BP, Tepco Partners, ConocoPhillips and SemGroup Energy Partners.
Bruce MacPhail, director of contract terminals at Enbridge, said the company holds contracts with a variety of energy companies ranging in length from six months to several years. The company's 15.5 mm barrel storage capacity at Cushing is nearly full, and running ahead of last year's levels [2007], MacPhail said, adding, "We're fully leased out."

Enbridge operates about 100 tanks as a major player in Cushing. The tanks range in size from 55,000 barrels up to 575,000 barrels.
"Right now oil is trading below the cost it takes to get it out of the ground," MacPhail said. "The true cost should be closer to $ 50, $ 60 or $ 70 a barrel. There's an incentive right now to store crude."

The trend has caught the attention of the International Energy Agency, which noted in its monthly oil market report that abundant oil supplies in a decreasing market and lower tanker freight rates have contributed to an increase in ships being used to store crude.
"The increase in floating storage has developed as a result of abundant prompt supplies having a hard time finding customers, further supported by lower freight rates," the International Energy Agency said.

Frontline Chief Financial Officer Jens Martin Jensen told earlier that between 20 and 25 oil supertankers have been contracted out for floating storage in recent weeks to hold up to 50 mm barrels of oil. Storage vessels are now anchored in the US Gulf of Mexico, the North Sea, India and Malaysia.
Tudor Pickering Holt's Pursell said current conditions remind him of the last time oil prices bottomed out below $ 10 a barrel back in the late 1990s. Speculation about the number of ships in service has been running rampant, he said.

"If you took the number of rumoured tankers storing crude and counted them all up, you'd end up with more tankers than you have existing in the world," he said.
"Numbers tend to get exaggerated. Tanker rates are low because OPEC is cutting production and there's plenty of supply. You can charter one, fill it with crude and make money doing that."