(John Kemp is a Reuters market analyst. The views expressed are his own)

Oil producers may be struggling as a result of low prices but the oil storage business has never been in better shape.

U.S. refiners, traders and logistics companies added an extra 11 million barrels of working storage capacity for crude oil between March and September, according to the U.S. Energy Information Administration.

Since September 2011, total capacity for storing crude in the United States has expanded by almost 87 million barrels, 19 percent, the EIA reported on Monday ("Working and Net Available Shell Storage Capacity" Nov. 30).

Most of the extra capacity has been added at tank farms and other offsite locations (+84 million barrels) rather than refineries (+2.5 million barrels) where space is often constrained.

The biggest additions have come in states on the U.S. Gulf Coast (+60 million barrels) with most of the rest in the Midwest (+32 million barrels) especially around the NYMEX delivery point at Cushing (+18 million barrels).

Some commercial crude is stored in underground salt caverns leached from salt domes or bedded salt but most is held in aboveground storage tanks constructed to special standards set by the American Petroleum Institute (API 650 tanks).

By contrast, the U.S. government's Strategic Petroleum Reserve, which contains almost 700 million barrels of crude, is entirely stored in salt caverns in Texas and Louisiana.

Commercial storage capacity is also expanding around the rest of the world including major trading hubs in Singapore, South Africa and the Caribbean

Commercial storage is big business although the companies involved all prefer to keep a low profile.

Most facilities are owned by unlisted private firms or subsidiaries of oil companies, although one international operator, Vopak, with storage facilities around the world, including some in the United States, is quoted on the Amsterdam stock exchange.

Storage remains profitable because there are high entry barriers to both owning and storing physical crude.

Crude is bought and sold in large volumes and requires expensive specialist tanks connected to marine terminals, refineries and the pipeline network.

The entire business is capital intensive and networked among a small professional community which is relatively closed to outsiders.

Furthermore, oil is toxic so the business of owning and storing oil is strictly regulated by local, state and federal governments.

More Tank Farms

Demand for storage has been growing rapidly in recent years. In response a large number of new tank farms and tank farm expansions have been commissioned.

Total working crude storage capacity has grown from 465 million barrels in September 2011 to 551 million barrels in September 2015, according to the EIA, and is set to expand further in 2016.

Some extra storage is needed for operational reasons to maintain an uninterrupted flow of oil to refineries, settle out water and blend different crude streams to optimise the mix before it is fed into refinery distillation towers.

As U.S. oil production has risen from 5 million barrels per day in 2008 to more than 9 million barrels per day in 2015, operational storage requirements have also risen.

But some extra storage is more speculative in character and used to make money when the oil market is trading in contango.

When prices for future delivery are above spot prices, refiners and traders buy physical oil and put it into storage, selling an equivalent number of contracts for future delivery at the higher forward price.

When the futures contracts mature, the physical oil can be delivered against them, or the contracts can be rolled forward by selling another set of contracts even further in the future.

Profits from the strategy, which carries little risk, are equal to the difference between the spot price and the future price, minus interest and storage fees.

Since 2011, the U.S. crude market has been in contango on three days out of every four, with an average price gap of 23 cents per barrel per month between the first and third futures contracts.

In 2015, the market has been in contango every day, with an average price difference of 65 cents per barrel per month between the first and third futures contracts.

With interest rates close to zero, most of the contango remains to be shared out between the owner of the crude oil and owner of the storage space.

The strategy is attractive when the oil market is oversupplied and inventories of crude and refined products are rising, which has been the case throughout 2015.

Storing oil has become enormously profitable, with the result traders have bought as much physical crude as possible and sent it to tank farms.

In turn, traders and third-party logistics providers have scrambled to construct as much new space as possible to cash in on the storage boom.





(Editing by David Evans)