U.S. may skirt oil storage crisis as drivers hit the road

Wed Apr 1, 2015 6:10am EDT
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By Jonathan Leff

NEW YORK (Reuters) - A month ago, it seemed inevitable: a massive global oversupply of crude oil production would overwhelm storage tanks in Oklahoma and fill supertankers off Singapore.

Now, there are growing signs that the U.S. oil market can avoid the doomsday scenario in which it runs out of room to stockpile surplus crude, a development that oil traders worried would send crude prices into another tailspin.

One reason is that refiners, spurred by high profit margins, are rushing to buy crude and churn out more fuel in response to an unexpectedly swift rise in U.S. road travel and soaring Chinese demand for fuel-hungry sport utility vehicles.

Furthermore, shale oil drillers have hit the brakes on new wells faster than many anticipated. This could throw years of unyielding growth into reverse as early as May.

Oil prices are starting to reflect these changes. U.S. crude has rebounded from a six-year low of $42 a barrel, although those gains were built partly on growing anxiety over tumult in Yemen last week and a drop in the U.S. dollar.

"On a global basis I think sentiment has definitely shifted," says Amrita Sen from Energy Aspects. "The main reason it's shifted is that people are realizing demand isn't actually that bad; in fact, it's phenomenally strong."

A subtle, but perhaps more telling, shift is taking place in how crude futures are priced.

U.S. oil futures for May delivery, the month by which most traders had been expecting the key storage hub of Cushing, Oklahoma, to fill to the brim, traded at a $1.73 a barrel discount to April on Monday, down from the $2 discount weeks earlier.   Continued...

Oil storage tanks are seen at sunrise with the Rocky Mountains and the Denver downtown skyline in the background October 14, 2014.  REUTERS/Rick Wilking