The oil crisis has been developing for several months now, but it still continues to make big news! As the price of oil continues on a heavily volatile trend, the United States is running out of places to store the commodity. While oil was trending upward Tuesday, long term effects of storage shortages could send the price of oil spiraling back down to depths we generally wouldn’t expect it to go. So, today we’ll cover the basics of what caused the oil crisis, talk about why we’re seeing shortages in storage space for the commodity, and chat a bit about why we can expect this problem to drive the price of oil down even further.
A Short Overview Of What Caused The Oil Crisis
The oil crisis all boils down to supply and demand. As more an upward trend in the production of oil sent supply up, the price of the commodity had nowhere to go, but down. As a result, most oil production countries looked to Saudi Arabia (the worlds largest producer of oil), asking them to slow down production. However, the reality is that every time we run into problems like this, Saudi Arabia generally does slow down production. However, while they limit their production other countries tend to ramp up what they’re doing in the industry. So, this time Saudi Arabia said “no” and stuck to their guns on keeping production rolling.
As a result, over supply in comparison to demand pushed the price of oil further and further down. Today the price of oil hovers around $60 per barrel after falling from over $110 per barrel since June of 2014.
Why Oil Storage Space Is Dwindling In The US
While Saudi Arabia and other nations can afford to produce oil at a meager profit when the price is down, that’s not the case for the United States. As a matter of fact, at today’s oil price, if United States oil production companies wanted to sell their product, the vast majority would take a loss. That’s because it costs far more than $60 per barrel to produce oil in the United States. Just the cost of keeping oil rigs going in the United States can be around $50 per barrel. Then, after counting in other expenses, the business becomes a wash!
To avoid taking a loss, several American oil production companies are now storing the oil they produce; waiting for the price to rise before they sell it. The only problem is, the United States is purchasing and producing over a million barrels of oil more than the country actually uses every day. All of that oil has to go somewhere; so, it’s making it’s way to storage.
Although storing oil to wait for profits may seem like a good idea, the new problem of running out of places to store it is becoming apparent. As a matter of fact, the United States is already using about 80% of its total oil storage capacity; a number that’s growing rapidly.
How This Can Become A Much Bigger Problem
If we keep going at this rate, US oil storage tanks will reach 100% capacity by July. That in itself creates a real problem. If this were to happy, the United States would be forced to sell the barrels of oil that it produces and is contracted to buy at a loss. If this were to happen, oil supply would flood the market further, causing the price of oil to drop dramatically; let alone the negative affects the phenomena would have on the United States economy.
Although the price of oil may seem to be stabilizing, there are big problems brewing behind the scenes. The bottom line is this…even though the we don’t seem to be feeling the oil crisis today as much as we did a month ago, it’s becoming a bigger problem. Nonetheless, this does open an opportunity for traders to make money. If the tanks do top out, traders can ride the oil price wave all the way down, earning profits with every turn.