AFP via Getty ImagesAn aerial view of a crude oil storage facility is seen on May 5, 2020 in Cushing, Oklahoma. - Using
Cushing is going to fill up! Cushing is filling up!!! Of all the hyperbolic, buffoonish comments uttered by talking heads on CNBC
and in the financial media, this is the worst. According to the most
recent data provided by the EIA, Cushing has 93.346 million barrels of
storage capacity, of which 76.093 million barrels’ worth is classified
as working storage. The EIA’s weekly data showed 65.446 million barrels
in storage at Cushing as of May 8th, a figure that declined by 3
million barrels in last week’s data. So, even at its peak, Cushing was
86.0% full. Then how could Cushing storage possibly be “running out”
with 14% of existing capacity available and more implicitly in reserve?
Cushing has never run out of storage. Cushing never will run out of storage.
In the past eight years, Cushing’s working storage capacity, as
measured by the EIA, has increased 58.5%. The amount of oil stored at
Cushing is more than three times the amount stored there 15 years ago.
America is producing more oil. America’s midstream companies somehow
noticed this trend and have produced more storage tanks in which to
store that oil.
But as the contract for West Texas Intermediate crude for June
delivery finished its trading life Monday at 2:30 ET quoted at $32.13
per barrel, that does not explain what happened the last time. Last
month’s contract (for May delivery) finished trading on April 21st at
$11.57 per barrel, after famously closing at (-$37.63) per barrel on the
day prior to expiration.
Why?
It’s all part of a trade. Last month that trade was “short oil.”
This month the trade became “long oil.” It’s that simple. The
commodities markets are characterized by wild swings in sentiment and
just as wild swings in price. This is why producers and consumers
hedge, and use oil contracts to balance out their natural biases
(producers are naturally short and consumers are naturally long.)
But the headlines in April screamed “oil prices turned negative
because there was no place to put it,” when the government’s own figures
show there was, in fact, ample space to store oil. Why? Well, renting
Cushing storage—controlled by big midstream players—is not as easy as
renting a U-Haul or as scalable as leasing server space from Amazon
AMZN
. As the EIA stated in its April 27th, 2020 Today in Energy publication:
Although EIA data indicate that some storage remains available at
Cushing, some of this physically unfilled storage may have already been
leased or otherwise committed, limiting the uncommitted storage
available for financial contract holders without pre-existing
arrangements. In this case, these contract holders would likely have to
pay much higher rates to storage operators for any uncommitted space
available. Taken together, these factors suggest that the phenomenon of
negative WTI prices is mainly confined to the financial markets.
As with any financial product, when amateurs get caught short market inefficiencies occur.
The existence of the USO oil ETF, a frequent target of my criticism in my Forbes columns,
only exacerbates this situation. Because USO’s sponsor, USCF, states
quite clearly in its many SEC filings that it has no means to take
delivery of physical oil and no desire to do so, USO serves to create
more paper contracts and offset the natural balance of hedging. As
those contracts are rolled—though USO has changed its contract
purchasing/selling process several times in the past month—that creates a
net shortage of the paper, and the markets can get wacky.
So, for those who like to proclaim European superiority over American
methods, the Euros have us beat when it comes to oil pricing. Brent
oil trades only in paper form, and unlike Cushing, Brent is not a
physical town, but a location of offshore platforms (three of four of
which have been shut down as the field matures) in the North Sea. No
one can deliver oil to Brent because there is no such place, although
the contract price is composed of a mix of three other locations that
are actually physically sited.
This is not meant as any disrespect to the good folks of Payne County, Oklahoma. Cushing is important,
and a quick check of any pipeline map would show that most of the U.S.’
massive hydrocarbon superhighways have been built to stop by Cushing to
“count” in oil delivery figures before heading elsewhere to be
refined. The nearest refinery to Cushing is a one-hour drive north up
OK-18 in Ponca City at Phillips 66
PSX
’s facility, and the salt caves that hold the U.S.’
strategic petroleum reserve sit in four sites along the Gulf Coast, the
closest one to Cushing located in Bryan Mound, TX, about 550 miles
away.
So, contrary to the takeaway from articles like this credulous Bloomberg piece,
Cushing has plenty of space. Those who hold short positions in oil may
not want you to believe that, but it's the truth. Remember always that
those same folks are just as likely to be the ones telling you—via
compliant reporters in the mainstream financial media—that all is fine
and dandy in the energy markets when they happen to be long those very
same contracts.
It’s probably best not to listen to them at all.
No comments:
Post a Comment