VLO Valero Energy Corporation

By Amrith Ramkumar, Tristan Wyatt and Collin Eaton 

The world is awash in oil.

Lockdown measures are crippling demand, and supply isn't falling quickly enough to keep up. Oil-storage tanks around the world are rapidly filling with crude, leaving the new production coming out of the ground with nowhere to go.

The overwhelming glut is threatening one of the world's vital industries and could prolong the economic fallout from the coronavirus. As storage filled, one price for U.S. crude recently fell below $0 a barrel -- a first in oil-market history -- effectively meaning sellers would have to pay buyers to take barrels off their hands.

Even with a recent rebound as parts of the world reopen for business, oil trades at a fraction of where it started the year. Most energy companies would lose money producing at these levels.

Stockpile data are incomplete or delayed, but recent figures already illustrate the crisis:

Global oil inventories fall into two main categories: commercial stockpiles and strategic reserves held for emergencies. Most investors focus on changes in commercial inventories because those are most sensitive to shifts in global supply and demand.

Producers and traders who don't want to sell crude at today's low prices can try to store it in hubs around the world, then sell in the future. The problem now is that demand for storage space is skyrocketing.

U.S. commercial stockpiles are rising at their quickest pace ever in government data going back to 1982. At 532.2 million barrels during the week ended May 1, inventories are soon expected to blow past a record of 535.5 million barrels from March 2017.

The increase has been pronounced in Cushing, Okla., a key hub. Analysts said dwindling storage space in Cushing contributed to the recent drop in one futures contract below $0 a barrel. On April 20, that futures contract was close to its expiration date -- meaning traders had to either sell it or accept delivery of actual barrels of oil at Cushing by the following month.

Those stuck holding the contracts likely couldn't find available storage for oil and began paying others to take the contracts from them.

It is hard to know how much space is actually available. Logistical hurdles mean storage tanks can't be filled to the brim, and competition for remaining space is fierce. That means much of the remaining empty room could have already been claimed for future use. Even so, the official Energy Information Administration figures show Cushing inventories rising at a pace that would have them completely full in weeks.

As a result, crude-futures prices recently traded around their lowest levels in two decades.

Normally, when oil prices slide, consumers travel more, limiting the price drop and eventually spurring a rebound. But with much of the world practicing social distancing, fuel consumption has plummeted.

That means companies industrywide are struggling. Refiners such as Marathon Petroleum Corp. and Valero Energy Corp. that take in oil and turn it into petroleum products including gasoline are bringing in much less crude. The extra crude must find a home in storage.

In addition to Cushing, other U.S. storage hubs are located in the Gulf Coast. A flood of oil from Saudi Arabia, the world's largest exporter, is starting to arrive in the region -- fallout from a March production feud between the kingdom and Russia that raised global supplies even as demand crashed.

That extra crude could make the glut in the U.S. even worse. Oil normally moves seamlessly through a network of pipelines and storage hubs across the country, but more of it will have nowhere to go.

The excess oil is forcing energy companies to curb spending and shut in productive wells. Some companies are starting to go bankrupt and lay off employees. The turmoil is erasing hundreds of billions of dollars from the sector's market value.

There is also a large amount of oil floating at sea with nowhere to go, according to cargo tracker Kpler. Some ships have even been crowding off the California coast recently.

Oil-market analysts are also watching inventories overseas, particularly in China, the world's largest commodity consumer. Figures from analytics company Kayrros show a rise in those stockpiles recently, too.

And with supply projected to continue exceeding demand for the time being, many analysts expect prices to remain volatile.

--Emil Lendof and Sarah Toy contributed to this article.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and Collin Eaton at collin.eaton@wsj.com

(END) Dow Jones Newswires

May 07, 2020 05:44 ET (09:44 GMT)

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