With stocks edging higher, crude oil surging, the dollar pulling back and worries about Europe intensifying, today one of the most heavily watched indicators in the world just hit an 80-year high!
Here is a key portion from today's note by Art Cashin: "Crude Storage Capacity – Trading desks and Wall Street watering holes are abuzz with chatter about how fast crude oil storage capacity is being used up. … Two days ago, another good friend and fellow trading veteran, Jim Brown, of Option Investor, also wrote on the topic. Here's a bit of what he wrote:
Oil inventories are at 80 year highs and global storage is filling up fast. Once available storage is at capacity the impact to oil prices is going to be dramatic. Crude inventories in the U.S. have risen over 30 million barrels in the last four weeks to 413 million barrels. That is an 8% rise in inventories in just four weeks and this can't continue forever. According to the EIA the U.S. has 373 million barrels of storage capacity in various tank farms plus 70 million barrels at the Cushing Oklahoma futures delivery hub. Refineries have another 148 million barrels of capacity.
In theory that is 591 million barrels of storage capacity except that you can't fill everything to capacity. Operators like to keep 15-20% of space available for operations. They need to have space available for new oil coming in while old oil in other tanks is flowing out. Some of these tank farms blend crude by combining heavier crude with lighter crude to match refinery input specifications. That requires available capacity to provide the blending tasks of moving oil around. In reality the threshold level is probably in the 475 million barrel range and we are at 413 million today. Inventories normally rise until early May so there may be some trouble ahead. Crude oil declined -4% today to $50.78.
The International Energy Agency (IEA) released their monthly report today and warned that excess oil supplies will raise global storage to a record 2.83 billion barrels by the end of June. The IEA warning means lower prices ahead but they do expect the supply/demand ratio to be back in balance by the end of 2015. Currently production is 1.5 mbpd over demand and that oil has to be stored somewhere.
The U.S. Energy Information Administration (EIA) said its production expectations for 2015 and 2016 were virtually unchanged from the prior month. They believe new oil coming online from new projects will offset any temporary decline in shale production.
The world's largest oil trading company Vitol said they expect a "dramatic build in oil inventories over the next few months." If oil builds as we expect we could see a dramatic drop in prices. Most oil analysts believe the +20% spike in crude over the last two weeks was short covering and a new move lower is ahead.
Once land storage and tanker storage nears capacity, oil prices could turn ultra-volatile. Stay tuned.
Consensus – Sweden does a surprise rate cut as currency warfare heats up. European markets are celebratory on hint of Ukraine ceasefire. That could lead to a range breakout in the U.S. markets. Stick with the drill – stay wary, alert, and very, very nimble." ***ALSO JUST RELEASED: MAJOR WARNING – Fear Barometer Just Spiked To One Of The Highest Levels In History! CLICK HERE.
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