Supply Chain Optimization

Warehousing Problem

 
Not many people woul\d call it a warehousing problem, but simply put, there is almost no place to put oil production…storage facilities (tank farms = warehouses) are full.  When I asked one oil executive last week when they would use pipelines to store crude, the response was – many are filled already.  This, along with a flotilla of 20 tankers filled with 490 million barrels of Saudi oil headed for Texas and Louisiana, has pushed front-month futures to near-record lows.  Let me explain, futures for May expire in a few days and are not widely traded.  When futures contracts come close to expiration, their price typically converges with the underlying price of physical barrels of oil.  Otherwise, traders could profit from the difference between oil futures and oil barrels. 
 
This is a supply and demand issue.  Oil demand is down by an estimated 29 million barrels a day, while supply is far ahead of that.  Don’t expect diesel to drop precipitously.  As I have previously explained, Diesel demand is sustaining – but when you make diesel, gasoline is a by-product – and gasoline has to be stored somewhere.