Crude inventories at Cushing, OK, reached a record high for the week ending March 4, 2016, but the pricing market did not respond conventionally to the news of added supply. Instead of falling, the price of West Texas Intermediate (WTI) rose as some market participants anticipate global production cuts.
Cushing stocks have topped the 2015 high set April 14, 2015, 19 times this year, according to Genscape. On March 4, 2016, Cushing stocks were more than 3.5mn bbls higher than in April 2015. The record-high surpassed the previous one set March 1, 2016 by less than 100,000 bbls.
Capacity utilization at Cushing also hit a record high March 4, 2016, topping the March 2011 utilization record by less than one percent. As of March 4, utilization of operational tank capacity remained less than 80 percent, which Genscape considers to be an operationally maximum level.
Since 2011, close to 32mn bbls of storage capacity has been added to the storage hub.
Price market shrugs off Cushing stock builds
Despite the record-high inventories, WTI crude prices rose $1.32/bbl to $38.09/bbl on March 7, 2016 in the first three hours after the data for March 4, 2016 was published, according to the NYMEX Light Sweet Crude Oil futures contract, which has a locational basis of Cushing.
A lower-than-expected midweek Cushing change may have contributed to the WTI strength. Even though stocks reached a record high, the rate of stock increase between March 4, 2016 and the prior measurement on March 1 was the second lowest rate in a month. Additionally on March 7, 2016, Patoka, IL, stocks – another storage hub in PADD 2 – declined by more than 1.0mn bbls for the week ending March 4.
The price increase March 7, 2016 furthered a rally that has been in play since mid-February 2016. The front month WTI price increased as much as 47 percent from a low of $26.06/bbl on February 11, 2016 primarily on announcements of production freezes. Market participants have expectations that a March meeting of OPEC and non-OPEC countries could result in production cuts.
The price rally since the middle of February 2016 has not been the result of any structural fundamental change in the market, but rather based on the perception that the fundamentals are likely to improve, said Dominick Chirichella, founding partner of the Energy Management Institute.
If a March meeting does not result in a production cut agreement as expected, and production quota is adhered to, the price of WTI may decline.
“Only time will tell as supply continues to outstrip demand with Iran adding more oil into the market and U.S. shale oil declines, but only slowly,” Chirichella said.
U.S. crude and refined product in storage is at all-time highs and continues to build, global production of crude oil is still greater than demand, and some refiners have started to cut run rates with refining margins squeezed. Once supply and demand return to a more balanced position, it will take time to drain inventories of crude that have built over the past 1.5 years.
Cushing capacity expansions
Even though capacity utilization hit a high March 4, 2016, utilization is expected to decline with new capacity additions. As of March 4, 2016, Plains All American was the only Cushing operator with new capacity under construction. Three tanks, a total of 810,000 bbls of capacity, have completed final testing phases and could come online any day, according to Genscape. “I would expect them all to be online before the end of March,” Marcus Waldner, Genscape’s oil storage manager, said.
Plains also recently started construction on 540,000 bbls of additional storage capacity. “Right now we have their completion date roughly estimated for September 2016” Waldner said.
Cushing pipeline capacity imbalance – Will it get worse before it gets better?
Another thing to watch in terms of pricing impacts is the potential for Cushing to become bottlenecked. In fact, the potential for Cushing to become bottlenecked is higher now than it was in 2012, in that there is more incoming pipeline capacity than take away capacity to the tune of +646,000 bpd. In the last year, an additional 225,000 bpd incoming pipeline capacity has been added to Cushing via SemGroup’s White Cliffs, Tallgrass’ Pony Express and Magellan's SCOOP connection.
The situation may get worse before it gets better as the 190,000 bpd Platteville, CO, to Cushing Saddlehorn pipeline is expected to be completed by mid-2016. Additional outgoing pipeline capacity via Plains’ 200,000 bpd Cushing to Memphis, TN, Diamond Pipeline isn’t expected to be completed until late 2016. Should these projects stay on schedule, the Cushing pipeline capacity imbalance will grow to +836,000 bpd before settling at +636,000 bpd once both projects are complete.
However, the likelihood of a bottleneck in the near future is relatively low as most of the incoming capacity is underutilized due to declining U.S. production. Should production increase in these areas the capacity imbalance could again become a problem.
Genscape's Cushing storage data is collected using infrared cameras, aerial diagnostics, and other proprietary measurement techniques. This approach translates into highly accurate, advance notice of the actual oil storage levels at Cushing. To learn more or request a free trial of Genscape's Cushing Crude Oil Storage Report, please click here.