Podcast Summary
Understanding the role of storage and transportation in the oil industry: Companies like Principal Asset Management offer a comprehensive perspective on the oil industry, including storage and transportation, while the Tank Tiger serves as a clearing house for terminal storage, ensuring the physical delivery of oil.
While we often focus on macro aspects of industries like oil production, it's essential to consider the behind-the-scenes aspects, such as storage and transportation. Companies like Principal Asset Management provide a 360-degree perspective, combining local insights and global expertise to identify investing opportunities. Meanwhile, in the oil industry, the storage and transportation sector play a crucial role in ensuring the physical delivery of oil to meet financial obligations. The Tank Tiger, for instance, functions as a clearing house for terminal storage, connecting those seeking storage with available capacity. This intricate web of logistics ensures the smooth flow of oil from production to consumption.
Tank Utility Exchange: Airbnb for Tanks in Oil and Chemical Storage Industry: Tank Utility Exchange facilitates flexible and efficient transactions between those with excess tank capacity and those in need, offering liquidity and transparency in the oil and chemical storage market
Tank utility exchange functions as an intermediary in the oil and chemical storage industry, facilitating transactions between those in need of storage and those who have excess capacity. This business model, likened to Airbnb for tanks, allows for flexibility and efficiency in the market, particularly during market swings where long-term contracts expire and excess capacity becomes available. While some companies may choose to own their own storage facilities, many opt to lease from third parties to avoid the associated liabilities and costs of maintaining constant usage. Tank utility exchange adds liquidity and transparency to the market, enabling a mix of long-term relationships and spot market transactions.
Limited US oil storage capacity due to opposition to new facilities: Opposition to new US oil storage facilities limits capacity, causing oil majors and trading companies to lease existing ones for operational use and arbitrage opportunities. Demand for new storage facilities continues due to renewable energy push and need to store feedstocks and renewable fuels.
While the US has the ability to produce oil in large quantities, particularly in areas with fewer population constraints, the country's ability to store oil, especially in strategic locations, is more limited. This is due to increasing opposition to building new storage facilities in densely populated areas. Instead, oil majors and trading companies often lease storage facilities for their operational use and to take advantage of arbitrage opportunities. The midstream sector has seen fluctuations in demand for tank construction, with periods of significant growth driven by exports to Mexico and the rise of renewable fuels. Despite the Gulf Coast being the largest holder of tanks inventory in the US, the demand for new storage facilities continues to grow due to the global push towards renewable energy and the need to store and transport feedstocks and renewable fuels.
Navigating complex midstream infrastructure during market fluctuations: Principal Asset Management helps investors navigate midstream infrastructure complexities during market price crashes and high contango periods, offering global expertise and local insights.
The infrastructure to store and transport oil has been a significant concern throughout the years, especially during periods of high production and low demand. This was evident during the oil price crash in 2015 and the pandemic when storage solutions became creative and unusual, with people parking oil in frac tanks, pipelines, vessels, and even railcars. However, the dream business environment for midstream asset owners is during high oil prices and high contango, meaning higher prices for oil in the future. This scenario is not common but would be ideal for the midstream industry. Principal Asset Management, with its global expertise and local insights, is well-positioned to help investors navigate the complex world of real estate and energy markets. To learn more, visit principalam.com. (Note: Investing involves risk, including possible loss of principal.) Matt Levine and Katie Greifeld's new podcast, Money Stuff, dives into Wall Street finance and other related topics every Friday. Listen to it on Apple Podcasts, Spotify, or wherever you get your podcasts.
Optimal oil storage facilities: Combination of location, pipeline connectivity, price, and proximity to trading hubs: The best oil storage facilities offer a desirable location, pipeline connectivity, competitive pricing, and proximity to trading hubs, making them essential for producers and providing optionality and liquidity in the oil supply chain
A favorable oil storage facility is one that offers a combination of desirable location, pipeline connectivity, price, and proximity to other storage and trading activity. Producers pay various fees at each stage of moving oil from the well to the storage tank and eventually to export, making storage facilities an essential part of the oil supply chain. The oil is transported from the well to an aggregation terminal, where it is pumped into a larger terminal and then injected into a long-haul pipeline. The best facilities are those that can bring in oil from multiple locations and offer outbound connectivities to various markets, providing optionality and liquidity. These facilities, often located in major trading hubs like Houston, Cushing, and New Orleans, are typically the first to get leased due to their advantages.
Terminal pricing for petroleum products: Terminal operators charge per barrel, per month for storing oil and diesel. Prices range from 90 cents to a dollar a barrel for oil and less for diesel. Minimum lease term is one month, but secondary market exists for buying/selling storage capacity.
The pricing for storing petroleum products, such as oil and diesel, in terminals is typically charged per barrel, per month. The cost can vary greatly, with Houston markets ranging from 90 cents to a dollar a barrel for oil and slightly less for diesel. Terminal operators generally require a minimum lease term of one month, although some more desirable terminals may require longer commitments. There is also an active secondary market for storage capacity, where individuals or companies can buy and sell storage capacity much like an apartment lease. This market can offer opportunities for speculation on future pricing or rerouting of stored petroleum products.
Trading companies store oil in their own tanks for profit: Trading companies lease tanks to store oil for market needs, rather than for subletting, for increased profitability.
Trading companies lease tanks for their own use in the oil industry, rather than for subletting. They anticipate market needs and it can be more profitable for them to store or blend the oil themselves. The market for leasing oil storage tanks is not highly liquid, but innovative contracts like those on CME did exist. Crude oil can be stored indefinitely in tanks, while refined products have a shorter shelf life and need to be turned over and consumed. Tanks have floating roofs to control vapor pressure and a circular hole at the bottom for piping, with the bottom of the tank being where all the sludge and crud accumulates.
Paying for full capacity despite usable capacity loss in oil tanks: Despite regulations ensuring safety, the oil industry faces challenges like vapor loss, diesel shortages, and transportation limitations, but effective inventory management helps mitigate potential issues.
In the oil industry, when leasing a tank, you're actually paying for the full capacity even though the usable capacity is less due to vapor loss. Regarding environmental concerns, there are regulations in place for storage tanks and inspections to ensure safety and compliance. The industry has faced challenges such as diesel shortages caused by disruptions in global oil supply chains, but today, inventory levels are building and prices are decreasing as a result. For the Northeast, which heavily relies on oil for heating, there are limitations to transporting oil from other producing regions due to regulations like the Jones Act. Overall, the oil industry faces various challenges and regulations, but safety procedures and inventory management help mitigate potential issues.
Transporting Oil: Pipelines and Alternative Methods: The oil industry relies on pipelines as the primary means for transporting oil from producing regions to consumer areas, but some areas lack pipelines and rely on imports via vessels or barging.
The infrastructure for transporting oil from producing regions like Texas to consumer areas in the northeastern United States involves a combination of pipelines and alternative methods like barging. For instance, while pipelines serve as the primary means for transporting oil from the Gulf Coast to the northeast, areas further north, such as Vermont, lack pipelines and instead rely on imports via vessels from Europe or barging up the inland waterway from New York Harbor. Additionally, the oil industry has seen significant changes in recent years, including increased mergers and acquisitions among oil majors and independent shale producers, as well as the expansion of renewable energy infrastructure. These developments have led to shifts in refining capacity and terminal ownership, making the oil business a constantly evolving landscape.
Profiting from oil price volatility through storage: During oil price drops, storing oil becomes more valuable, offering potential arbitrage opportunities. Creative storage solutions can be used when traditional capacity is full, but consider market liquidity and environmental concerns.
During times of extreme volatility in oil prices, such as the one discussed in the podcast, there are opportunities for profit in the storage market. This is because when oil prices drop significantly, the cost to store oil becomes more valuable, creating potential arbitrage opportunities. Additionally, creative storage solutions, such as using railcars or pipelines, can be employed when traditional storage capacity is maxed out. However, it's important to note that these markets may not be fully liquid yet, and there may be environmental concerns to consider. Overall, the conversation highlights the importance of adaptability and creativity in navigating market volatility.