This Place Is Empty - Is It Time to Panic Over Falling Cushing Oil Inventories?

During the summer of 2018, crude oil inventories at the trading hub in Cushing, OK, dropped to extreme lows. With estimated tank bottoms around 14.6 MMbbl, Cushing stockpiles hit 21.8 MMbbl for the week of August 3. Traders’ alarm bells were ringing, and upstream and downstream observers were wondering if low storage levels were going to cause significant operational issues. But just when it seemed tanks were nearing catastrophic lows, inventories reversed course and started to climb. Since August, crude stocks have increased by 13.6 MMbbl, or nearly 60%, and there is now talk of potentially too much crude en route to Cushing, maxing out capacity there. There are many contributing factors to this most recent inventory swing, with increased domestic production and the tail end of refinery turnaround season being two of the bigger fundamental drivers. But the main catalyst has been the shift from a backwardated forward curve to a contango forward curve in the WTI futures market. Today, we continue our Cushing series with a snapshot of recent contango markets and the impact those prices have had on stockpiles at the central Oklahoma hub.

The world is in desperate need of more crude oil right now and anybody with barrels is scouring every nook and cranny for any additional volume that can be brought to market. Some of that may come from increased production, but the oil patch is a long-cycle industry, just coming off one of the most severe bust periods ever, and it will take time to get all the various national oil companies, majors, and independents rowing in the same direction again. For now, part of the answer will be to drain what we can from storage — after all, a major purpose of storing crude inventories is to serve as a shock absorber for short-term market disruptions. To that end, the U.S. is coordinating with other nations to release strategic reserve volumes to help stymie the global impact of avoiding Russian commodities. Outside of reserves held for strategic purposes though, commercial inventories have already been dwindling as escalating global crude prices have been signaling the market to sell as much as possible. Stored volumes at Cushing — the U.S.’s largest commercial tank farm and home to the pricing benchmark WTI — have been freefalling for months, which raises the question, how much more (if any) can come out of Cushing? In today’s RBN blog, we update one of our Greatest Hits blogs to calculate how much crude oil is actually available at Cushing.

The Cushing, OK, storage and trading hub plays critically important roles in both the physical and financial sides of the crude oil market. Located at a central point for receiving crude from a wide range of major production areas — Western Canada, the Bakken, the Rockies, SCOOP/STACK and the Permian among them — the hub also has numerous pipeline connections to Gulf Coast refineries and export docks, and to a large number of inland refineries. And, with Cushing’s 94 MMbbl of storage capacity and status as the delivery point for NYMEX futures contracts for West Texas Intermediate, the hub’s inventory levels and the WTI-at-Cushing price are closely watched market barometers. But like a lot of other U.S. energy infrastructure in the Shale Era, Cushing’s place in the energy world has been in flux. Most importantly, Permian production has been surging, the ban on U.S. oil exports is a fading memory, and the Gulf Coast — not Cushing — is where most U.S. crude production wants to go. Today, we discuss Cushing’s changing role and highlights from RBN’s new Drill Down Report on the U.S.’s most important crude hub.