You're doin' fine, Oklahoma! Oklahoma OK: Crude oil supply, Cushing storage, and the WTI-Brent Arb

You may have heard that Cushing, Oklahoma is no longer the center of the crude oil universe.  The logic goes that WTI is no longer representative of the world crude oil price. …The WTI-Brent arbitrage is broken.  …NYMEX and ICE are looking for trading hubs to replace Cushing.  ….The days of WTI as a hedging vehicle for everything between jet fuel in Wisconsin to crude oil production in Latin America are ancient history.  ….Rail cars from the Bakken are moving to St. James, LA or Albany, NY.  …Certainly not Cushing, OK.   ….All the shale oil barrels want to get to the huge Gulf Coast refinery complex, bypassing Cushing.  ….It is only a matter of time before Cushing devolves into a dusty Oklahoma town with a lot of rusting tanks.   …And all crude oil will trade against St. James, or Brent, or some new Gulf Coast index.

This week I spoke at the Platts North American Crude Oil Marketing Conference in Houston.  It was well attended with a lot of engaging presentations.   The “What happens to Cushing?” theme came up time and time again. Although sentiment was far from unanimous, the general consensus and the market evidence clearly indicates that rumors of Cushing’s demise are greatly exaggerated.  In fact, Cushing, Oklahoma is doin’ fine.  There’s plen’y of air and plen’y of room --- to build more storage capacity, more rail racks, more inbound pipelines, and more outbound pipelines.  That is exactly what is happening. 

One of the most informative presentations was from Abudi Zein, Genscape SVP.  For the past three years, Genscape has been collecting data on crude oil storage facilities in North America by doing frequent  airplane flyovers and infrared photography.  It is a fascinating fundamentals data acquisition model that covers all of the major above ground storage hubs.  Only St. James (where most of the crude is in underground caverns) is underneath the Genscape radar.

Some of the key points from Abudi’s presentation follow:

  • About 126 MM barrels of U.S. and Canadian crude oil storage are visible to the Genscape system.  More than 50% of the total, or 67 MM barrels of the total are in Cushing.  That is up from 54 MM barrels only one year ago.
  • The next largest storage hub is Hardesty at 17 MM, followed (in order of size) by Patoka, Edmonton, Midland, Wichita Falls, Colorado City, Hardisty-Caverh, Kerrobert, and Wink.
  • Today about 11 MM barrels of new storage capacity are physically under construction at Cushing.  That is 65% of all the hub-based, above-ground crude tankage being built in North America.   The construction sites are tracked by Genscape’s aerial photography. In addition to Cushing, there are about 3 MM bbls under construction at Hardesty, and around 1 MM bbls each at Edmonton, Midland, and Patoka.
  • Capacity utilization at all of the facilities is well below 100%.  Today Cushing is about 55%, down from 80% this time last year.  Utilization of most other facilities this year is 40-50%. The highest is Midland at 75%.

A few other fun facts from other presentations:

  • There are several unit train terminals (100+ rail car loading facilities) being built in the Bakken to relieve pipeline transportation constraints in the region. (see A Perfect Storm in the Bakken.)  There are only two places in the country that can handle receipt of these unit trains without breaking them up and losing the efficiencies of unit train transportation:  St. James, LA (home of Light Louisiana Sweet) and Stroud near Cushing, OK (home of West Texas Intermediate and the CME/NYMEX futures delivery point).   Few refineries have the available land necessary to build one of these facilities.  [James Cairns, Vice President, Petroleum and Chemicals, CN Rail]

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