7 ms·

>why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract? G

>why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract? Good question. The answer is because they don't think it will be profitable. Why aren't you?

colinmhayes 6y ago
I've never been to Cushing Oklahoma. I feel like it should be possible to build a big tank in a week or two. Why isn't available storage space skyrocketing?
- edoceo 6y ago
  It's not possible to build a tank in two weeks, even if you had all the material and equipment at the ready. Plus, capital intensive for what may only be a spike in storage. These physical goods are much harder to store than bits.
- alasdair_ 6y ago
  There are regulations covering storing enormous quantities of oil, including certification of the holding tanks etc. For example, any container over 55 gallons is subject to EPA regulation and counts towards the total permitted site quantity. Storing more than 1,320 gallons above ground requires the site to have an approved SPCC (Spill Prevention, Control, and Countermeasures) plan. You can store 42,000 gallons below ground but that requires excavation, permits etc. Basically: it's difficult to do on short notice. Further reading: https://www.epa.gov/ust/aboveground-storage-tanks https://www.epa.gov/ust/aboveground-storage-tanks
- WJW 6y ago
  There is a little bit more to an oil tank than just steel walls. You need proper foundations, fire prevention systems, disaster plans, probably get hooked up to the pipeline network, etc etc etc. Even if it were quick, the amount of oil being pumped up is massive and you need more than a few tanks to store it all. Finally, tanks are long term infrastructure and it might not be profitable to build out storage too much just in the hope of catching once-in-a-lifetime negative pricing events.
  - jmccaf 6y ago
    Yeah, it's worth building these tanks safely. There was tank fire last year in Bay Area after a quake: https://www.youtube.com/watch?reload=9&v=KMZjfWRXgTs https://www.youtube.com/watch?reload=9&v=KMZjfWRXgTs Even if there is different level of risk and safety concern, and air quality regulation in rural Oklahoma vs urban CA bordering a highway, these can catch fire dramatically. One point made when that fire occurred was that the tanks are placed in earthen basins, so that when tank fails, the flaming fuel just fills the basin, minimizing risk of spreading to neighboring tanks.
  - kens 6y ago
    Speaking of oil tank fire prevention, videos of foam fire suppression systems are pretty impressive. A gasoline tank fire goes from massive flames billowing into the sky to totally extinguished in 40 seconds. For example: https://youtu.be/OxLPvNdv2t4?t=210 https://youtu.be/OxLPvNdv2t4?t=210
- bmelton 6y ago
  I honestly don't even know if I can fathom how you could get permitted to build such a tank in a couple of weeks, but the answer to why that isn't happening _right now_ is probably because nobody wants to lay out a bunch of capital for a business that might do well contemporaneously but that has no future. Either things settle back down to normal at some point, in which case you've made some revenue, but probably not recouped your investment. The Cushing facility managed to build 7 million bbl capacity in the early 90s for $60 million. I expect it would cost $80-100 million to build today. Current (inflated) storage costs are 50 cents per barrel. Let's say that rises a LOT and skyrockets to $2 - that's a gross of $14 million per month. Assuming $0 in overhead, you'd need for this contango to last for another 7 months to break even. If we assume something like a 30% margin, then you'd need it to last around two years. Alternately, things don't return to normal. The market becomes depressed enough that airliners barely fly, and the global world consumption falls. The oil you're storing becomes cheaper to the point that storing it costs more than buying it, and there's nobody to sell it to. Your customers default, and your investment quickly becomes the thing that bankrupts you.
  - gridlockd 6y ago
    Great answer! Now let's forget about storing to sell later at a profit, at negative 37$, can't you just burn it for a profit?
    - bmelton 6y ago
      Assuming you can transport a 100+ pound liquid filled drum to a disposal facility that meets federal guidelines for less than that cost, and don't care about the environment, absolutely... but the real trick here is in knowing that the people who are already using oil and have the capacity to store it ... are... so other than just burning it, for a couple hundred million, you could probably supplant your stationary oil consumption with a non-petroleum alternative. It is ironically the portability of oil-refined products (gasoline, diesel) that makes it so appealing for things that aren't stationary -- planes, cars, etc.
  - colinmhayes 6y ago
    7 million barrels * $30 a barrel = 210 million just to take the oil. Plus $20 a barrel when you sell it brings you to $350,000,000 in revenue on a 7 million barrel tank. What am I missing, other than not being able to build the tank fast enough?
- ncallaway 6y ago
  > I feel like it should be possible to build a big tank in a week or two. When is the physical settlement of the contract? My understanding is that physical settlement of the May futures contract is 21 April (that is, tomorrow). So you don't have a week or two to build your big tank. It needs to be finished tonight. https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_product_calendar_futures.html https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
  - colinmhayes 6y ago
    Looks like first delivery isn't until may 1 according to that page.
- s1artibartfast 6y ago
  Our intuitions are so different I'm not sure if you are joking or not. My guess is that the build time is 1-2 years with 5 years of permitting up front. I also imagine building capacity is capped with a limited number of trained engineers/welders.
jliptzin 6y ago
Me, personally, because I don't even have a futures account at a broker that will let me take physical delivery, nor do I have any experience whatsoever renting tank space at the Cushing facility (which I didn't even know existed before today). But I guess the answer to my question seems to be that the cost of storing one contract worth of oil will, unbelievably, be more than $20,000 for the month.

colinmhayes 6y ago

I've never been to Cushing Oklahoma. I feel like it should be possible to build a big tank in a week or two. Why isn't available storage space skyrocketing?

edoceo 6y ago
It's not possible to build a tank in two weeks, even if you had all the material and equipment at the ready. Plus, capital intensive for what may only be a spike in storage. These physical goods are much harder to store than bits.
alasdair_ 6y ago
There are regulations covering storing enormous quantities of oil, including certification of the holding tanks etc. For example, any container over 55 gallons is subject to EPA regulation and counts towards the total permitted site quantity. Storing more than 1,320 gallons above ground requires the site to have an approved SPCC (Spill Prevention, Control, and Countermeasures) plan. You can store 42,000 gallons below ground but that requires excavation, permits etc. Basically: it's difficult to do on short notice. Further reading: https://www.epa.gov/ust/aboveground-storage-tanks https://www.epa.gov/ust/aboveground-storage-tanks
WJW 6y ago
There is a little bit more to an oil tank than just steel walls. You need proper foundations, fire prevention systems, disaster plans, probably get hooked up to the pipeline network, etc etc etc. Even if it were quick, the amount of oil being pumped up is massive and you need more than a few tanks to store it all. Finally, tanks are long term infrastructure and it might not be profitable to build out storage too much just in the hope of catching once-in-a-lifetime negative pricing events.
- jmccaf 6y ago
  Yeah, it's worth building these tanks safely. There was tank fire last year in Bay Area after a quake: https://www.youtube.com/watch?reload=9&v=KMZjfWRXgTs https://www.youtube.com/watch?reload=9&v=KMZjfWRXgTs Even if there is different level of risk and safety concern, and air quality regulation in rural Oklahoma vs urban CA bordering a highway, these can catch fire dramatically. One point made when that fire occurred was that the tanks are placed in earthen basins, so that when tank fails, the flaming fuel just fills the basin, minimizing risk of spreading to neighboring tanks.
- kens 6y ago
  Speaking of oil tank fire prevention, videos of foam fire suppression systems are pretty impressive. A gasoline tank fire goes from massive flames billowing into the sky to totally extinguished in 40 seconds. For example: https://youtu.be/OxLPvNdv2t4?t=210 https://youtu.be/OxLPvNdv2t4?t=210
bmelton 6y ago
I honestly don't even know if I can fathom how you could get permitted to build such a tank in a couple of weeks, but the answer to why that isn't happening _right now_ is probably because nobody wants to lay out a bunch of capital for a business that might do well contemporaneously but that has no future. Either things settle back down to normal at some point, in which case you've made some revenue, but probably not recouped your investment. The Cushing facility managed to build 7 million bbl capacity in the early 90s for $60 million. I expect it would cost $80-100 million to build today. Current (inflated) storage costs are 50 cents per barrel. Let's say that rises a LOT and skyrockets to $2 - that's a gross of $14 million per month. Assuming $0 in overhead, you'd need for this contango to last for another 7 months to break even. If we assume something like a 30% margin, then you'd need it to last around two years. Alternately, things don't return to normal. The market becomes depressed enough that airliners barely fly, and the global world consumption falls. The oil you're storing becomes cheaper to the point that storing it costs more than buying it, and there's nobody to sell it to. Your customers default, and your investment quickly becomes the thing that bankrupts you.
- gridlockd 6y ago
  Great answer! Now let's forget about storing to sell later at a profit, at negative 37$, can't you just burn it for a profit?
  - bmelton 6y ago
    Assuming you can transport a 100+ pound liquid filled drum to a disposal facility that meets federal guidelines for less than that cost, and don't care about the environment, absolutely... but the real trick here is in knowing that the people who are already using oil and have the capacity to store it ... are... so other than just burning it, for a couple hundred million, you could probably supplant your stationary oil consumption with a non-petroleum alternative. It is ironically the portability of oil-refined products (gasoline, diesel) that makes it so appealing for things that aren't stationary -- planes, cars, etc.
- colinmhayes 6y ago
  7 million barrels * $30 a barrel = 210 million just to take the oil. Plus $20 a barrel when you sell it brings you to $350,000,000 in revenue on a 7 million barrel tank. What am I missing, other than not being able to build the tank fast enough?
ncallaway 6y ago
> I feel like it should be possible to build a big tank in a week or two. When is the physical settlement of the contract? My understanding is that physical settlement of the May futures contract is 21 April (that is, tomorrow). So you don't have a week or two to build your big tank. It needs to be finished tonight. https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_product_calendar_futures.html https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
- colinmhayes 6y ago
  Looks like first delivery isn't until may 1 according to that page.
s1artibartfast 6y ago
Our intuitions are so different I'm not sure if you are joking or not. My guess is that the build time is 1-2 years with 5 years of permitting up front. I also imagine building capacity is capped with a limited number of trained engineers/welders.

jliptzin 6y ago

Me, personally, because I don't even have a futures account at a broker that will let me take physical delivery, nor do I have any experience whatsoever renting tank space at the Cushing facility (which I didn't even know existed before today). But I guess the answer to my question seems to be that the cost of storing one contract worth of oil will, unbelievably, be more than $20,000 for the month.