Stronger contango could boost storage: The Tank Tiger

Backwardation in many US petroleum markets has restrained demand for leasing storage space, but a severe financial crisis could tip prices into contango and incentivize storage demand, according to a petroleum storage broker and clearinghouse.

Though storage dynamics differ widely across US regions and petroleum sectors, "on a scale of 1 to 10, I would say that things are around a 4 for the overall storage market," said Ernie Barsamian, chief executive officer of The Tank Tiger.

"The super-duper terminals that everyone wants are still at or near capacity," while storage at the US pipeline hub of Cushing, Oklahoma, is well below capacity, Barsamian said in written comments submitted to Argus. Meanwhile gasoline storage in the New York Harbor is "nearly sold out," and demand for renewable fuel storage far exceeds available capacity, he said.

US crude markets have begun to shift toward a contango pricing structure, which could incentivize more storage demand, Barsamian said. The pricing for benchmark US crude futures priced at Cushing began to shift in late 2022 from a multi-year backwardated structure — where crude priced for prompt delivery sold at a premium to crude priced for future delivery — to a short term contango. The three-month contango for WTI futures has averaged about $0.30/bl so far in 2023, and has recently widened to over $0.40/bl.

But rising interest rates have boosted the cost of working capital for some petroleum industry storage players, and "as a result, you need a little more juice in the contango to put this trade on," Barsamian said.

The economic fallout from continued banking industry instability could "cast a pall over the entire economy" and tip North American crude and refined products markets into a stronger contango structure, similar to one seen in 2008-2009, which could further boost demand for storage assets, Barsamian said. However higher interest rates could counteract some of those effects to "put pressure and headwinds on storage prices," he said.

Overall Cushing storage levels are at less than half of the facility's capacity of 78.4mn bl. But not all Cushing storage locations are equal, Barsamian said, and some specific tankage there is full because of more desirable connectivity. Looking forward, "a strong contango will make all of the Cushing terminals look like Bruce Springsteen," he said, referring to the rock-and-roll singer, known to his fans as "The Boss."

Meanwhile many Cushing crude storage tanks are collecting revenue even though they are empty, because "just like renting a condo in Florida, you pay for the storage whether or not you are using it," he said.

Crude storage terminals located further south along the Gulf coast carry a strong premium to Cushing because of greater logistical options, he said. "If you have a crude tank in the Gulf [coast], you can go out by water or pipe to serve whatever market gets you the best premium," he said.

Chemical and renewable liquids storage assets will eventually come in handy, "so the message I'd like to send out to the terminals is, ‘If you build it, they will come,'" he said.

By Chris Baltimore