Here's How $20 Oil Could Become a Reality If Storage Runs Out

Though I find this piece kind of shabby I decided to post it because its a well written angle.

(source: bloomberg.com)

There's the makings of a crisis swirling in America's oil-storage tanks, and the next few months will determine whether it's a minor annoyance, or a major blow, to U.S. oil.

The basic problem is that too much oil is being pumped, and not enough is being used up. America is running out of places to store all of the excess crude. That’s a problem, and it could send prices plummeting -- some say to $20 a barrel or even lower. (For context: Last summer it was more than $100, and today it's less than $50.)

That's probably not going to happen, but it's not as crazy as it might first sound. Stockpiles are at record-high volumes after 10 straight weeks of increases. The U.S. is currently accumulating an extra one to two million barrels a day more than its using. The oil imbalance is bad, and it's still getting worse.

If oil inventories begin to top out, the consequences will be severe for the industry. The price of oil will plummet. Imports will probably take the first hit, followed by a curtailment of U.S. production. Bloomberg Intelligence crunched the numbers and found that the possibility of running out of storage space is high enough, and the consequences severe enough, that the risk should be taken seriously.

The next few months are critical. Every year, refineries schedule repairs for Spring—after demand for heating oil drops off and before summer driving season picks up. About a quarter of refineries shut down operations at this time. That puts an extra stress on inventories, because without refineries to process it, oil has no place to go.

Bloomberg Intelligence analyzed 10 years of maintenance-season data and found that if 2015 follows an average year of refinery maintenance, the current glut should never be more than a nuisance. But if 2015 matches up with the worst period in a decade, there will be trouble in the two biggest storage regions: Cushing, Oklahoma, and the U.S. Gulf Coast.

Worth noting: the analysis above assumes oil production is unchanged. So far, that hasn't been the case. Despite all of the pressures on U.S. oil, production continues to increase unchecked. And the storage tanks keep filling.

Personally I feel we should brace up for a surge in oil prices. It doesn't take genius to know that the U.S. production will be checked soon. Rather save the oil in the ground than sell at a ridiculous price. One should also note that oil is consumed worldwide and not just in the U.S. and as such they won't want to terribly upset the market balance.