Russia’s war on Ukraine turbocharged global crude oil prices and spurred price volatility the likes of which we haven’t seen since COVID hit two years ago. The price of WTI at the Cushing hub in Oklahoma — the delivery point for CME/NYMEX futures contracts — has gone nuts, and the forward curve is indicating the steepest backwardation ever. In other words, the market is telling traders in all-caps, “SELL, SELL, SELL! Sell any crude you can get your hands on. It’s going to be worth far less in the future.” So anyone with barrels in storage there for non-operational reasons is pulling them out, and fast! In today’s RBN blog, we look at the recent spike in global crude oil prices and what it means for inventories at the U.S.’s most liquid oil hub.
Even folks who don’t usually live and breathe crude oil know that Brent and WTI have risen wildly the past couple of weeks, with big hour-by-hour swings in oil prices and daily ups and downs that have put just about everyone on edge. Some think that, with the tightening sanctions against Russia — the world’s second-largest crude exporter after Saudi Arabia — the supply/demand imbalance that has characterized the market over the past few months will tilt way further out of whack, sending oil prices to the moon. Others say that prices can only go so high without destroying demand, and that OPEC+ and U.S. producers will ramp up their output to keep Brent and WTI prices at least somewhat in check. In the short-term, to try to blunt some of the price sting, the U.S. will release 30 million barrels (MMbbl) of crude from the Strategic Petroleum Reserve (SPR) in coordination with other allied nations releasing an equal volume, for a total of 60 MMbbl. (We track the SPR in our weekly Crude Oil Gusher report and we blogged about it a while back in I Want To Break Free.) While the U.S. SPR is the largest emergency stockpile of crude oil in the world, with its 62 underground caverns having an authorized capacity of 714 MMbbl, there’s another storage site with an even more outsized influence on the market.
Worlds apart from what’s happening in Europe, the small town of Cushing in central Oklahoma is the center of the U.S. crude oil universe. At Cushing, often called “the Pipeline Crossroads of the World,” inbound pipelines from Western Canada, the Bakken, the Niobrara, the Permian, and SCOOP/STACK, meet-up with outbound pipes to inland refineries and Gulf Coast refineries and export terminals. Cushing is also the delivery point for the CME/NYMEX futures contracts for West Texas Intermediate (WTI) — one of the most widely and actively traded physical commodity futures contract in the world and the benchmark underpinning most physical U.S. crude oil purchase and sales contracts. Last but not least, Cushing is home to the nation’s largest commercial crude tank farm — more than 350 aboveground tanks all sited within 10 miles, with an estimated 94 MMbbl of shell storage capacity, according to the Energy Information Administration (EIA; check out the Cushing Playbook for detailed maps of the Cushing facilities). Producers, midstreamers, and refiners use Cushing for operational purposes — that is, as a sort of waystation where crude can be received, blended to meet refinery specifications, and sent out when refineries need it. Those companies and marketers as well also use storage at the hub for commercial operations, primarily to take advantage of market opportunities around the timing, volume or quality of crude supplied from producers to refiners. For example, storing physical barrels today for sale at some future point, with the value of the trade usually hedged at prices on the CME/NYMEX forward market. (Of course, that only works when the price in the forward market is higher than the price today.)
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