Monday, May 4, 2020

The Most Critical Oil Storage In The United States

Figure 3. Cushing Oklahoma pipeline terminal map. Source: International Energy Agency.

“Cushing, Oklahoma: Pipeline Crossroads of the World.” The emblematic slogan of the Cushing oil hub does not exaggerate. Cushing, a town of several thousand, has become a media star lately as the oil world scrambles to store its excess oil.

This media star, however, has a somber message for the world: tanks are close to filling up.

Earlier this week, Treasury Secretary Steven Mnuchin said the government was working on expanding available oil storage space by several hundred barrels. He didn’t provide many details, but some of this expanded capacity could be located at the Cushing hub.

First of all, though, why is Cushing so important? 

That’s a simple enough question, unlike the one regarding the future of much of the oil produced in the United States. Cushing, Oklahoma, is the physical delivery spot for oil bought and sold in West Texas Intermediate futures contracts. In other words, if you buy WTI and want to take physical delivery, this is where the oil will be delivered.

The complex is truly impressive. With a maximum storage capacity of 90 million barrels across 15 storage terminals, Cushing is home to a network of as many as two dozen pipelines, with a combined inbound and outbound capacity of more than 6.5 million bpd. 

What’s more, this capacity has been expanding. Last year, Bloomberg reported there were six new pipeline projects in Cushing in the planning stage, which would add 2 million bpd of outbound capacity to Cushing’s total by the end of next year. At the time, Genscape’s director of oil market business development, Hillary Stevenson, told Bloomberg that not all of these would really get built, but some 750,000 bpd would. The more important news was that there were an additional 4.5 million barrels in additional capacity coming to Cushing.

Canada-based Keyera, a midstream player active both in Canada and the United States, began construction on a tank farm with a capacity of 4.5 million barrels in 2018, planning to complete the facility—the Wildhorse terminal—by the middle of this year. In a recent update, the company suggested that the terminal is on track to be completed on schedule. This additional capacity would certainly provide relief to oil producers struggling to find space for their oil. 

It is an interesting turn of events. Just two years ago, some questioned the relevance of Cushing in a world where the United States was a growing exporter of crude oil. Cushing is far from Gulf Coast refineries. It is far from export terminals. Finally, it is far from the huge shale oil fields of Texas and New Mexico. With more oil flowing to the Gulf Coast for export, it was reasonable to expect Cushing’s importance as oil hub would diminish.

Today, Cushing is more relevant than ever as all eyes are on oil storage. Exports are down because oil demand has been devastated by the coronavirus pandemic. They will recover at some point, but this point is in the future. For now, what everyone needs is more storage, and with Cushing accounting for 13 percent of the U.S. total oil storage capacity, it has deserved its place in the spotlight. It is also filling up fast.

Reuters reported earlier this month that mid-April, Cushing’s occupancy rate was over 70 percent or 59.5 million barrels of crude. That would not be a worrying rate if oil was also flowing out of Cushing. However, it is not flowing out. It is only flowing in, and the hub’s working capacity is 76 million barrels that, according to industry sources who spoke to Reuters, were all booked as of mid-April.

Things are not looking good. Here’s how Wood Mackenzie’s chief analyst Simon Flowers put it: “Cushing, Oklahoma, is a microcosm of the wider picture. Oil prices in Texas have incentivized producers to send crude to the Cushing hub; weak demand from refineries in the Mid-West and Gulf Coast have kept it there. Storage tanks are filling up rapidly – the three largest weekly builds on record were in consecutive weeks from late March.”

Analysts are now warning that Cushing will fill up in the next few weeks, and these warnings are keeping WTI pressured. Producers are shutting in wells, with North Dakota production alone already down by more than 250,000 bpd. Now, a further 300,000 bpd in production is expected to be cut, but it may come too late. Once Cushing reaches its limit, WTI will slump further unless the federal government builds emergency storage tanks in a matter of weeks. 

Cushing is anything but irrelevant in this crisis. The Strategic Petroleum Reserve can hold up to 713 million barrels of crude, but it is already 89 percent full, with 635 million barrels. Another 22 million are coming after the federal government agreed to lease space to several oil companies, which have already sent 1.1 million barrels into that space.

Another way to add capacity would be repurposing frac tanks for oil storage, according to an energy equity analyst. Yet these tanks need to be rented for that repurposing, CNBC’s Sam Meredith notes in a report on the topic, and rent has jumped, making this option a costly one. 

Traders are already shying away from WTI contracts after many got burned with having to pay to get rid of their May ones because of the size of the gap between demand for oil and supply. Now they are simply too afraid to hold WTI futures. And unless they get some good news, namely that demand is picking up, they will continue shunning the contract that made Cushing the oil industry star that it is. On the plus side, this could probably stabilize WTI prices even at a low level.

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