US oil production has surged to an all-time record of more than 13 million barrels produced per day. But where's all that crude actually going? And how is it being handled and stored? On this episode, we speak with Steven Barsamian, chief operating officer at the Tank Tiger, a clearing house for terminal storage, and co-host of the Tank Talk podcast, about the business of moving and storing oil and its related products. We talk about what storage capacity looks like right now, how it's changed over time, plus last year's diesel shortage in the Northeast. He also describes exactly how crude oil and refined products move from point A to point B, talks about the crud you find at the bottom of storage tanks, and explains why you should definitely not keep oil in the bathtub (or on your desk) to benefit from contango. This transcript has been lightly edited for clarity.
Key Insights from the pod:
What does the The Tank Tiger do? — 4:00
How oil storage deals happen — 5:47
The allure of third-party leasing — 7:50
Balancing oil production and storage capacity— 9:49
Pipeline capacity and investment — 13:25
Creative storage solutions in 2020 — 14:31
The economic sweet spot for midstream assets — 16:11
What makes a good storage facility? — 17:02
The lifecycle of crude oil and clean products — 19:57
How much does storage pricing cost? — 24:11
Does trading of oil storage exist? — 25:17
How long can oil be stored? — 28:06
The Northeast diesel shortage of 2023— 30:54
The big changes in the business — 35:10
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Tracy Alloway (00:10):
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal (00:15):
And I'm Joe Weisenthal.
Tracy (00:16):
Joe, do you remember that time I bought a barrel of oil?
Joe (00:19):
That was a classic, classic moment in ....
Tracy (00:25):
You can say it. In all of financial journalism!
Joe (00:27):
A classic moment in all of financial journalism, where you actually acquired — it wasn't a barrel though.
Tracy (00:31):
No, it wasn’t.
Joe (00:32):
Let's be honest here. Let's be honest.
Tracy (00:33):
It wasn't. I tried to buy an actual barrel.
Joe (00:36):
It was like a gallon, right?
Tracy (00:37):
It was basically a jar of crude oil. I'm really happy I didn't buy an entire barrel in the end because part of the experience of doing this was I realized how difficult it is to actually move and store oil. Oil is a dangerous thing!
Joe (00:54):
Yeah, you had it on the desk next to us.
Tracy (00:57):
That's right.
Joe (00:57):
And then you left, right? You left for Hong Kong, or you left for Abu Dhabi, and you left the oil. And a bunch evaporated.
Tracy (01:03):
I'm not sure I should tell this story, but I couldn't figure out how to dispose of my jar of crude oil. So I just procrastinated and left it on the desk and it slowly evaporated and poisoned my colleagues.
Joe (01:15):
We all inhaled oil fumes for months and months and months on end.
Tracy (01:18):
Sorry about that, Joe.
Joe (01:19):
It’s alright, I survived.
Tracy (01:20):
All right. Well, I bring it up because I'm very, very curious about the business of storing and transporting oil right now. And part of the reason is because as we've been discussing on this podcast — we had a really great episode with our colleague Javier Blas, for instance — US oil production is at a record. I think it's more than 13 million barrels per day now.
Joe (01:42):
Yeah, it's really extraordinary. Obviously, in the US, production [is] just booming like crazy and you mentioned that episode with Javier. When we talk about oil most of the time, we're talking sort of macro. Like, who are the big producers? How much global demand is there, and what is the trajectory? What's happening in shale, what is happening in Saudi, etc.?
But as we like to do from time to time — these aren't just numbers on the screen — oil is definitely not just a number on the screen. And if you want to go long oil, if you're bullish on oil, you might be able to do that with a few clicks. But someone somewhere...
Tracy (02:16):
You don't want to take physical delivery!
Joe (02:18):
You probably don't want to, but someone somewhere has to have the physical, I don't know if it's [the] counterpart or the physical exposure to meet your financial obligation. So if you trade oil futures, someone there, like I assume, takes the other side on some level by having exposure to the physical product. Which means worrying about disposal, delivery, storage tankers, and so forth. And so this sort of the side of the business that's not usually talked about, we should talk about.
Tracy (02:45):
Absolutely. And just going back to that episode with Javier, I remember one of the themes from that was how much oil production patterns have changed in the past few years. And so I'm very curious if the storage and transportation patterns are also changing.
So I'm pleased to say we really do have the perfect guest to dive into the business of storing and moving oil. We're going to be speaking with Steven Barsamian, he is COO at The Tank Tiger, and also the co-host of the Tank Talk podcast, so a fellow podcaster. Steve, thank you so much for coming on Odd Lots.
Steve Barsamian (03:19):
Thanks Tracy, thanks for having me. And thanks for having me, Joe.
Tracy (03:22):
Maybe just to begin with, talk to us about what The Tank Tiger actually does. I was looking at the website. You describe yourself as a clearing house for terminal storage. And if you go to the website, Joe I don't know if you've done this yet…
Joe (03:35):
I have.
Tracy (03:35)
But you can look at basically kind of want ads for storage. It's like ‘looking for specialty chemical storage this amount’, or ‘I have available this amount of storage for a particular product.’
Steve (03:51):
Yeah, I mean, Tracy, you kind of nailed it there. That's kind of what we do. I like to say we're Airbnb for tanks.
Joe (03:57):
I was going to say Tinder for tanks, but Airbnb probably works too.
Steve (04:00):
My dad has used Match.com before. So that's kind of high level what we do. Essentially, we have customers that are terminals that store petroleum products, chemicals, and bioproducts, and they're all pretty much liquids and they go into a giant tank. I'm sure people have seen The Sopranos, the intro to The Sopranos, and those ginormous tanks in the intro, that typically holds gasoline or diesel.
And essentially you can lease them out like an apartment and people pay for a term on that tank like you would pay for a term on an apartment. And essentially oil traders, oil majors, they usually are the customers that lease those tanks. And there are terminal storage companies that are public companies that kind of lease them out [to] third parties.
So that's kind of how it works. And essentially, we kind of get in the middle of that and we try to facilitate the transactions of people that need storage and the people that have storage. And like you said it's kind of like want ads, trying to find the perfect match. And really that's what we've done for the past nine years. And so far we're still in business and still paying the bills.
Tracy (05:05):
‘Wanted storage unit with sensitivity and, I don’t know, affinity for poetry.’ That’s slightly random.
Joe (05:13):
How much of the business, if you look overall, is sort of big long-term relationships between some oil producer and some storage company? And then how much of The Tank Tiger’s business or anyone else's business is perhaps sort of like — I don’t know, maybe the term is ‘odd lots’ of oil storage, where some storage company has a little bit of extra space beyond what their contract is? I mean, I assume they're long-term contracts, but why don't you talk about the breakdown there of how these deals usually come together?
Steve (05:47):
So my dad, who started the company, he worked at Hess for over 30 years and he kind of started the third-party leasing of terminal storage at Hess. Those terminals are now not obviously owned by Hess anymore. And he kind of saw this need in the market to create this company.
And when he was doing deals at Hess, it was, you know, largely long-term deals or spot deals and essentially trying to find the best fit for their excess capacity and assets. So I would say, typically today with us being in the market, we've kind of added some liquidity and transparency. A lot of the big players, you know, there are big and small terminals. And a lot of them have, like you said, long-term customers that have been there for years and years.
And then there are swings in the market where there's contango, which I hope your folks know what that is. It's basically in the futures market when the price is more than today's price. So essentially you can put oil away and make money by storing it. And then backwardation is the opposite so that disincentivizes storage. So that kind of fluctuates, and people leave and enter markets all the time. Companies change all the time, so leases runoff. So that kind of leaves that excess and incremental storage capacity that's up for spot or long-term lease.
Joe (07:02):
I was just going to ask one quick question. This comes up in a lot of the episodes we do on trucking, where we look at the rates and they say there's a spot rate and a contract rate for trucking. Is there basically an equivalent where you could sort of plot over time what sort of contracted rates there are for long-term relationships, and then a spot rate that fluctuates both up and down relative to the contract?
Steve (07:23):
Yeah, definitely. I mean, you kind of hit the nail on the head there. Long-term rates, they're kind of steady at a certain threshold and it has to make sense for both sides. And there are spot rates that kind of move kind of with the markets and that's exactly it.
Tracy (07:38):
So, I know some oil majors obviously have their own storage, but a lot of people are clearly leasing it from third parties. Why is that? Why not just build out your own capacity?
Steve (07:50):
Some do, but it's kind of like the old economics model that I remember from an episode of The Office. Usually you don't want the liability and you have to essentially use that tank all the time if you're going to be building it. That's really [where] leasing comes in, you don't have that general liability of operating a terminal. So you just can come in and go as you please when you need it and when you don't need it.
Most oil majors do own their own storage for their own operational use. I would say a lot of oil majors these days are trading, physical trading. And they will take advantage of arbitrage opportunities by leasing storage in certain markets, whether that's for blending or moving product from A to B or taking advantage of contango as I mentioned.
So, they kind of do both. And there’s oil trading companies that exist that are just these companies that trade commodities from all different parts of the globe. And basically, they operate with long-term and short-term leases to take advantage of the same trading opportunities as I kind of just mentioned.
Joe (08:56):
You mentioned those tanks in the opening scenes of The Sopranos. My assumption would be that in suburban New Jersey or suburban New York or wherever they are, there's probably not a lot of appetite to build more. That there are neighbors who probably do not want those big fields or those big terminals or the big storage facilities to continue to expand. I imagine people don't want to live next to them.
Whereas on the production side, it’s, I imagine in sort of depopulated parts of North Dakota or Texas or wherever there's [exploration], there's probably less of a constraint. So is there a mismatch in the country's ability to produce oil, which seems like it can ramp up crazy, versus the country's ability to store oil? Which I imagine, especially in strategic locations near ports, near where people live, is going to be somewhat constrained.
Steve (09:49):
For sure, Joe. I mean we live, or I live, all of us live kind of in the New York area and New York Harbor is the NYMEX hub for gasoline and diesel. And I don't know if people have noticed, but there's a giant bunch of tank farms in the area and really that kind of has actually constrained over the years.
A lot of terminals have been sold and turned into warehouses. And like you mentioned, NIMBY, nobody wants to see an oil tank pop up in their backyard. So a lot of that is actually kind of constraining here in this geography. Whereas you mentioned other parts of the US and the globe, they’re probably more willing and there's nothing around them to build more tanks.
Building tanks, I mean, it kind of fluctuates with the market as I said before. We started the podcast with production growth, which was a big boom in midstream in the early parts of the 2010s with fracking. And kind of midstream followed along with that too, to facilitate the movement of that production. And that was kind of the big midstream boom there. And then recently with the opening of the Mexican border, there was a big boom for midstream needs to move products to Mexico, whether it was by rail...
Joe (10:56):
Sorry, the tanks are midstream?
Steve (10:58):
Midstream tanks, sorry.
Joe (10:59):
No, I'm just making sure. But tanks are considered midstream.
Steve (11:02):
Midstream, yes. Midstream terminals. Yes. Midstream includes pipelines, tanks, etc. So there's downstream, midstream, and upstream. So you had a big boom for Mexico, there were a lot of tanks built for that movement of products to Mexico and all these companies were able to do business in Mexico. So that provided the opportunity to expand and build more tanks for that.
And then recently we've seen on the chemical side and on the agricultural side, which kind of leads into renewable fuels, we've seen quite a large movement to build more tanks for housing renewable fuels. And that's not a coincidence, there's been a global push to get into renewables. When I say renewable fuels, that's biodiesel, that's ethanol, that's renewable diesel, this product called SAF that's meant for airlines. It's a replacement fuel for jet fuel.
And then, you know, there's the feedstocks that are used to produce these products. And those are typically palm oils, vegetable oils, used cooking oil. All these products need to be imported and then moved to the production facility. So that's kind of facilitated this kind of new boom in midstream and terminal infrastructure of building more tanks for that. And that's largely, I mean, we've seen it largely across the US and it's predominantly happened in the Gulf Coast too, where I would say the Gulf Coast is one of the largest holders of tank inventory in probably the US. Injust sheer total capacity, it's definitely the most active and the largest.
Tracy (12:52):
There used to be headlines about the US running out of oil storage. I think during the depths of the pandemic in 2020, we started to see those crop up. But even before then, I think during the shale boom, there were storage concerns and the pipelines were getting clogged up and things like that. Do those concerns still exist today? If US oil production is at more than 13 million barrels per day, we've seen this massive surge, is the infrastructure to handle the movement and storage of that where it needs to be?
Steve (13:25):
Yeah, actually. We kind of overbuilt our pipeline capacity a little bit in anticipation of all this production and needing — pretty much any incremental barrel we produce is exported, because we've kind of satiated our need with the refining capacity here in the US for light crudes.
So we kind of overbuilt it a little bit and the production's trying to keep up to get to that point where levels are paying for that infrastructure that was built. You know, kind of the things you mentioned from your prior point, it was around 2015 when oil kind of cratered, and oil typically does boom and bust cycles as everybody says.
And that was a bust cycle in 2015 with all that production and yeah, pretty much everybody that had a tank was filled during that time period. And then we had the pandemic, which was more on the demand side where there was no demand for oil, so people had to park it in every nook and cranny. I mean, that might've been the craziest two months of my life during that period.
Tracy (14:26):
What did you see? Did you see, uh, creative storage solutions?
Joe (14:30):
Yeah, talk about that time.
Steve (14:31):
Yeah, it really was pretty wild. I'm not going to lie, it was unprecedented for so many reasons, for so many people. And we did see so many unusual things, which probably won't be replicated. We had people parking frac tanks, which are these small portable tanks, and filling them in with oil next to Cushing, which is the NYMEX hub for WTI. And for futures contracts, that's the easiest place to trade oil.
So, we were seeing that kind of weird level of detail of filling up and moving frac tanks to Cushing, people filling up pipelines and not even moving the oil. It was a very, very strange time. And typically it's more of a flatter market than that. And we were seeing another weird thing, you know, people booking vessels and just parking oil on large vessels and parking at sea or near ports. Oil on rail cars was another thing. People were parking on rail cars and parking them in rail yards.
So that was an interesting time, not going to lie. I was doing a lot of work in a very short period of time and also being in a lockdown was making it weirder.
Joe (15:40):
What is the economic sweet spot for owners of midstream assets? Because obviously, we could talk about oil in terms of volume or we could talk about oil in terms of price. Sometimes they move in the same direction, sometimes not. Often they move, I guess intuitively, they move in opposite directions. What is the sort of dream business environment if you're in the midstream space?
Steve (16:02):
Probably the dream is high oil prices and high contango. That's pretty much the dream.
Joe (16:09):
So high oil prices, but even higher in the future.
Steve (16:11):
Yeah, exactly. I would say that's probably the dream scenario. Typically that doesn't happen, but that would be the dream scenario. I mean, then you have producers still producing, moving the oil, which, you know, they're paying tariffs for the pipeline. And then they're paying it for the export of moving it from the pipeline to the tanks to the dock and onto a ship, so that's making money for the terminal all the way through. And then they're making money on the storage costs, which, you know, people are just going to park oil in the storage and pay for it. So I would say that's a good dream scenario.
Tracy (16:43):
What makes for a good storage facility? And obviously I get that the requirements are going to depend on the exact product. But in general, what are the things people are looking for when they're looking for storage capacity? Is it just price, or is it maybe safety or convenience, things like that?
Steve (17:02):
So when we started The Tank Tiger, storage prices were very, very opaque. And we tried to bring a little bit of light and transparency. Like I said, we've been doing this for eight years now, so people kind of trust us I think. So we've been able to kind of shed some light on storage pricing. And it was a black box, you know, somebody could have been paying $2 more than the other person in that same terminal or vice versa. So we've been able to actually create [a] kind of more transparency and liquidity in what we do.
But to answer your question, I would say it's a combination of all. So typically in a flatter or more backwardation market or a small contango market, the more what I call well-connected facilities or desirable locations are going to be the first to get leased out. And typically those are terminals in Houston, those are terminals in New York Harbor. Like I mentioned Cushing and along the river in New Orleans.
You know, these are pretty much major trading hubs and logistical hubs. And for at least oil terminals, the better they're connected, which means the best pipeline-connected facilities, tend to do better than the ones that are not as well-connected, pipelined. And that kind of means they're bringing in oil from multiple locations, so it gives a person optionality. And they're bringing it to their outbound connectivities [which] our vast and broad, so that kind of lends itself to be a favorable facility.
And then, you know, obviously price matters a lot as well. And then logistically, it’s location. So customers that lease storage want to be around other people who lease storage, so they're able to move barrels from point A toB and that provides some liquidity and trading activity. So they don't want to be stuck in the middle of nowhere and [have] nowhere to sell their barrels. That kind of hurts a lot if they can't sell and the market’s bad.
So that's kind of what I would say lends to a favorable facility in crude and clean products — clean products are like gasoline, and diesel, jet, and crude oil. Obviously, it's crude oil, so they're kind of segregated in different terminals. Typically different facilities handle both, so there are differentiators between those two.
Tracy (19:17):
I have a really basic question since you mentioned the pipelines. But how does the oil or the product get from the pipelines into the actual storage facilities? What is the mechanism?
Steve (19:30):
Are we talking from a crude oil or a clean product standpoint?
Tracy (19:33):
I guess we could do both. I'd be curious to hear the sort of life cycle of both those things — from stuff comes out of the ground and then gets moved or stuff comes out of the ground and gets refined and then put into storage. Because I don't really understand the physical process, the sequencing of it. And do the pipelines like plug in directly into storage tanks? I can't imagine that's the case, but go ahead.
Steve (19:57):
Sure, of course. I'll start with crude because that's where it all starts. So typically they drill it out of the ground and the way it's moved is into kind of an aggregation site. Either they move it via a truck or a pipeline that's connected kind of close to the well. And that's moved into an aggregation terminal.
And from that aggregation terminal, a terminal that has tanks, so it's literally taken — if it's a truck that's driving it to the terminal, they'll stick a hose into the truck, it'll pump it into a tank. And then at that tank, there’s multiple tanks in that little small terminal that'll pump into a bigger terminal. And that bigger facility will then inject it into a long-haul pipeline. Some of the long-haul pipelines from the Permian go to Houston or Corpus Christi for crude. Corpus for their refining complex and to export out of there. And then Houston for their refining complex and to export out of there.
So when it goes to the long haul pipeline, typically the midstream company that owns the long haul pipeline also owns the terminal at point A and point B, so when it's coming in and when it's going out. And then from that pipeline, it'll go into various tanks in that tank field, depending on manifolds and connections in that terminal.
And that's kind of how it moves. And then in that terminal, there's multiple pipes that are connecting each individual tank so it can move from one point to another and one tank field to another. Certain terminals have interconnected tanks and it's just like kind of a web inside the terminal how the oils move to each location. And then from that tank, it's either transported onto a dock, so the dock is located at the terminal. It's piped into the dock, and a ship comes up and the ship is loaded and it goes off to some foreign port.
Or it's moved into another pipeline that is connected, generally, to a refinery. And then the refinery has their own tanks at their own plant that they'll take from that tank into a distillation tower and start producing clean products.
And then that kind of leads me to clean products. So once a refinery produces clean products, typically [it] will start from Houston because that's where a lot of refining capacity is. So though a lot of these refineries have connections into some of these major terminal hubs in Houston where a lot of gasoline blending and diesel activity happens, and they're pumped into these terminals by a pipeline and it can go trade hands from one person to another.
And then it can be exported like I mentioned before, pumped onto a dock, and sent to South America or wherever. Or it can be shipped up Colonial Pipeline, which is the largest distribution pipeline in the US. And that pipeline has injections at the terminal site in Houston. And then there’s various stops along the way as it goes up to New York Harbor.
And then once it's at its destination, let's say at a terminal here in Linden or Bayonne or wherever in New Jersey, it hits the tank. And then typically it's consumed by a customer. So you'll have a truck that comes up to the terminal, it'll load the product at the truck rack, and then it'll drive off to a gas station. So that's kind of how it works.
Joe (23:26):
That was great.
Tracy (23:26)
Yeah, that was a really good overview.
Joe (23:28)
Alright, first I have a very quick, simple question. The basic pricing, I mean, are we basically talking about a sort of barrel-per-day type of pricing?
Steve (23:39):
Storage pricing?
Joe (23:39):
Yeah, storage pricing.
Steve (23:40):
Yeah, so it’s essentially like you said, it's in dollars per barrel per month. So that's a typical storage.
Joe (23:48):
What's a typical price on an average market to store a barrel of oil?
Steve (23:52):
It varies quite a bit. I mean, petroleum products are probably slightly less expensive than chemical products in terms of pricing. So it just kind of...
Joe (24:03):
Like in a dollar amount? Like if Tracy suddenly had a barrel of oil, which maybe she would, what would it cost her to store it for a month in a typical market?
Steve (24:11):
Okay, so let's start in Houston. Gasoline components in Houston are around 90 cents to a dollar barrel. Diesel's a little bit slightly less than that. And essentially you're paying for [a] one-month minimum, you have to pay for at least one month. That's the minimum a terminal will do. More desirable terminals won't even do that month. They're like ‘You need to take a year or so.’ So you basically pay for that year whether you use it or you don't use it. And then there are actually secondary markets where people are allowed to sublease their tanks like you sublet an apartment.
Joe (24:44):
This was going to be kind of my next question. Is there an active speculative market for storage capacity? In other words, could I say ‘You know what? I want to go long on the cost of storing oil here? Or I just want to buy a bunch of capacity and I don't know if I'm going to use it, but I think I can resell it for more six months from now? Or I want to buy a bunch of capacity here and sell a bunch of capacity here because I think it's getting rerouted.’ Can you just sort of be like a computer warrior and trade capacity in some way?
Steve (25:17):
So yeah, that's kind of a multifaceted question. So yes, trading companies will take speculative positions and lease tanks. But typically, they don't do it so they can sublet it. It's typically they're anticipating some sort of market need and you usually want it for your own use, whether it's blending or storing the oil. And that will actually make you more money than subleasing the tank. Because it could be, you know, [an] exponential factor [in] how much more money you can make having that tank.
And yeah, there is a secondary market. I wouldn't say it's that liquid, but with us being around, it's maybe gotten more liquidity to it. And in terms of future buying of storage, so it's interesting you say that. There was a company that had futures exchanged for storage on CME. And you were able to, if you wanted to book June storage for a certain amount price, and it would be a one-month contract. So that contract did exist. I'm not sure if it's still on CME, I'd have to check. I don't remember offhand because they were kind of a competitor of ours. But yeah, that did it. And it was pretty innovative and that did exist. So yes, you could kind of do both.
Tracy (26:42):
How long can oil be stored? And the reason I ask is, going back to me keeping a jar of oil on my desk and slowly poisoning my colleagues, I really didn't mean to do that, Joe.
Joe (26:53)
Thank you. Thank you, Tracy.
Tracy (26:54)
Yeah, I was surprised by how quickly it actually evaporated from this jar. And there was other weird stuff that happened. F=Like for instance, the solids start settling at the bottom, right? And so every once in a while, I remember I would pick up this jar and just kind of shake it to get it looking how it looked when I first received it.
But there are all these considerations that go into actual physical storage. How long can you actually do this? And again, thinking back to the Strategic Petroleum Reserve, I always have this picture in my mind of a mountain of oil barrels in storage somewhere. But I don't know if that's actually the case, if we have barrels of oil that are just sitting around for decades or something like that.
Steve (27:38):
So yeah, you just mentioned it, crap can go to the bottom of a tank. And that does happen naturally in all tanks. You know, if you've ever opened one of those large crude oil tanks, you'll see some interesting things at the bottom of it.
Tracy (27:52):
Like what? Like rocks and stuff?
Steve (27:54):
I mean, crude has all types of metals. Not rocks, but it's just sludge.
Tracy (28:01):
Solids. And you can't shake it, presumably?
Steve (28:06):
No, they typically clean the bottoms. Every once in a while, terminals will have to clean the bottoms of a tank to get all that crud out of there. But you can basically park crude oil in a tank forever. I mean, it's essentially the same as leaving it in the ground. Typically products, once it's refined, they need to be turned over and eventually consumed. Their shelf life isn't as long as crude oil.
Crude oil, you can just really leave there forever. And all terminals have what I would call, so for crude oil they have floating roofs that sit on top of the crude oil to control the vapor pressure. And then there's the bottom of the tank. So there's actually a little hole, a circular hole in a tank and that's where the pipe is connected to.
And actually beneath that hole there, there's what's called the bottoms of the tank or the heels of the tank. And that's where all the crud is. And then on top of that is where the oil is able to pump out of the tank. So when you're leasing a tank, you're actually leasing that full capacity, even though technically that usable capacity is less than what you're paying for. So that's just kind of an industry standard.
Tracy (29:11):
What happens to the vapor?
Steve (29:12):
When you suck oil out of the tank? That's a good question, I don't even know.
Tracy (29:17):
Okay, we're going to have to do a whole other episode on oil vapors.
Joe (29:20):
That is sort of what I was wondering next. Has the midstream/storage industry been forced to do any changes as a result of sort of climate and other questions? I mean, obviously, you hear about it in natural gas with methane leaks, etc. That’s a particularly potent contributor to climate change. Has there been anything in your world that has to be done differently, business practice-wise, in terms of storage handling or distribution in order to meet environmental guidelines?
Steve (29:52):
They're changing those rules every year or so. I mean, there's a regulatory agency that has standards for these tanks and they look to change them based on events or to meet climate goals like you mentioned. So yeah, there are standard practices in place and you need to take tanks out of service every certain number of years to get it inspected and make sure it's up to code. And yeah, essentially, there are basically [bylaws] that terminals need to follow to keep safety procedures. And luckily in the eight or nine years that I've been doing this, there haven't been as many or that many incidents of terminal leaking or fires or anything like that.
Tracy (30:33):
So around this time last year, there was a lot of discussion of a diesel shortage in the Northeast and it was a pretty big deal. I think the White House actually put out a statement on it at one point. How did that come to happen? How bad was it in retrospect and why does it seem to have gone away?
Steve (30:54):
Yeah, it's funny, everybody lives kind of in the short term. They're like ‘We're running out of diesel,’ and then nobody's talking about it today. It was the same thing with IMO 202, I don't know if you guys remember that. But essentially, I believe that was around the war in Russia and Ukraine, the sanctions happened and people were not accepting Russian oil. So that disrupts global supply chains and there's this natural flow of market efficiency of moving the oil from point A to point B that kind of suffices the global demand for oil.
So basically global demand stayed pretty high and there wasn't enough supply to reach that with the sanctions. So that's kind of what led to the shortage in that time period. And that can cause spikes when there's no inventory. Say there's a really cold winter and you need heating oil and there's none there. The price just keeps going up, so that can cause severe spikes. But when there's inventory, that kind of flattens out those spikes because it kind of smooths that process.
Today, we're not really having those issues. Actually, that level is kind of [a] historic low for low inventory. And today, we're building inventory on the distillate side and it's kind of I would say a normal market, as you would say. And we don't really have those issues today.
And I would say that's mostly because kind of Russian oil's gotten out and demand has weakened a little bit from our consumption standpoint. Refiners have been able to adapt and produce more heating oil and more diesel. So I think it's a combination of factors like anything. And that kind of causes a little bit of an oversupply and that kind of fills the tanks and that's almost a self-fulfilling prophecy. Once inventory levels build, that's what traders watch. And as they see inventory levels build, that kind of decreases the price of oil, and that actually encourages more people to park more. So it just kind of builds like that.
Joe (32:55):
The Northeast, especially in winter as you mentioned, uses a lot of oil for heating. We produce a lot of oil [but] not in the Northeast. There are some pipelines but because of the Jones Act, we can't…
Tracy (33:10):
Where's our Jones Act klaxon?
Joe (33:12):
Right, the air horn forevery time the Jones Act comes up. But is there a perversity, or how do you see that play out where it's like okay, the US has oil, there are tankers, there is domestic need. What is the infrastructure like for getting or not getting oil from, say, Texas to the homes in the Northeast that want to heat their homes?
Steve (33:33):
I mean, obviously with the invention of fracking and natural gas, that has kind of alleviated a lot of the heating oil need and that's kind of helped a little bit as well. I would say the majority of the product for us in the Northeast is coming from the Gulf Coast and the refinery complexes down there...
Joe (33:52):
Via Pipeline?
Steve (33:52):
Via the Colonial pipeline. And then further up north in the New England area, they're not connected to any pipe.
Joe (33:59):
Right, there's no pipeline in Vermont.
Steve (34:01):
No. So, they'll take diesel supplies from Europe via vessel or they'll barge it up from New York Harbor and put it into terminals in Boston.
Joe (34:10):
Barge. So wait, that means an inland waterway from New York? So you can do pipeline from Texas to New York, and then via barge, so that way you don't have to deal with any Jones Act issues.
Steve (34:23):
Yes. Yeah, you don't have to pay for Jones Acts...
Joe (34:24):
Because it’s not a part... Okay, okay.
Tracy (34:25):
Barges are so underrated. I always think that whenever they come up.
Joe (34:29):
Yeah, totally. Also just America's blessed inland waterway system is incredibly underrated.
Steve (34:36):
Yeah, for sure. I was going to say, Jones Acts, they still do exist. People still do lease them and they will still take them. Typically it goes to Florida. Most of the Jones Acts go from the Gulf Coast to Florida. I mean, you'll see some that go to New England, but not as many.
Tracy (34:53):
So, I know it's been a busy few years for the oil and commodities industry in general. But looking back, now versus 2020, what's been the big change in your business? If you could sort of just encapsulate it for us?
Steve (35:10):
Sure. It's kind of crazy how quickly everything has changed so much in only three years. I mean a lot of the oil majors were crying because oil prices were so depressed and refining margins were terrible. And now oil prices are high and refining margins are great and a lot of these big companies are reaping tons of profit.
We've seen a lot of mergers and acquisitions on the shale production side with a lot of independent shale producers getting gobbled up by these oil majors because shale producers are seeing good evaluations and the majors are looking to grow their drilling production. But without actually having to drill holes in the ground, they can just acquire a company. So, you know, we're seeing a lot of that. And from a refining standpoint, I mean, there's going to be new refineries built across the world and that's going to eat away at domestic refining capacity.
From us on the midstream side, the terminal side, we've seen a lot of mergers and acquisitions as well. A few big recent buyouts happened and that's kind of changed the hands of the names of the tanks. So same assets, different names. And that's kind of what we're seeing recently, you know, just in the past few months.
And basically what I mentioned earlier was the global demand for renewables. And that's not just talk. It's happening today and there’s definite capital expenditures being put into building plants and building terminal infrastructure to house these renewable fuels. So it'll be interesting what the next few years hold for that. But yeah, I mean, it's constantly changing and that's kind of what keeps me on my toes and keeps me interested in this oil game. But yeah, it's been different since 2020, a lot of things have changed.
Tracy (36:52):
Alright. Steven Barsamian, thank you so much for coming on Odd Lots and explaining the business of storing and moving oil and its various products to us. Really appreciate it. That was fun.
Steve (37:01):
No, thank you for having me.
Joe (37:03):
Yeah, that was great.
Tracy (37:15):
Joe, that was a fun conversation. I enjoyed that. It brought back a lot of memories for me about that buying oil project. And there was actually a broker who took me out on his boat to go around Arthur Kill…
Joe (37:29):
That sounded really fun.
Tracy (37:30):
… And look at all the terminal facilities and the tankers out there and stuff. There are a few things that stuck out for me. So, I was kind of surprised that we have actually built out storage infrastructure to the extent that we seem to. Because it does seem like in so many other areas, the US sort of struggles with building just in-case capacity. But for some reason, it seems to have worked out in the oil world?
Joe (37:56):
That was really interesting. I mean there were a lot of interesting things. I remember March, or I guess April 2020, when we had the negative oil price for one day.
Tracy (38:05):
Negative oil prices, yeah.
Joe (38:06):
And I remember thinking there must be some market somewhere that is essentially the mirror image to this oil price, but we don't have a chart. Because I don't think storage capacity data is as common as the oil price data or is as readily available. But I remember at the time thinking there must be some chart somewhere that is literally the mirror image of this because someone with some marginal storage capacity must have seen the amount that they can rent out their space for, essentially shoot up positive 40 or something de facto like that. Because if you have this oil and you're producing so much and you run out of space, like you're desperate, right?
Tracy (38:46):
Right. That was when everyone was joking about buying oil and storing it in their bathtub and stuff like that.
Joe (38:51):
You were ahead of the curve on owning oil ahead of that. But yeah, right? That would be the ultimate time if you had the capacity. You must have just been making a fortune.
Tracy (38:58):
I did think it was interesting Steve brought up the sort of creative storage solutions that you did see at the time. So for instance, just keeping your oil on rail cars or just leaving it in pipelines for storage as opposed to using them to actually move it. I wonder, yeah, crazy times.
Joe (39:16):
I’m also interested how, I guess at some point, there was a CME futures contract for capacity. And like intuitively, there's got to be arbitrage opportunities where you're like ‘I'm long Houston storage capacity and short Louisiana storage capacity, etc.’ But maybe those markets have yet to be fully built down liquid.
Tracy (39:38):
Do you think Steve will let us advertise storage capacity on his website and see if we get anyone interested?
Joe (39:44):
Do you have storage capacity in your basement, Tracy?
Tracy (39:46):
I've got like one foot of desk space, if someone wants to store another jar of oil.
Joe (39:52):
Don’t do it. It sounds like an environmental headache, at the minimum.
Tracy (39:56):
Yeah, you're right. Okay. Shall we leave it there?
Joe (39:58)
Let's leave it there.