The unexpected arrival of some 70,000 barrels of crude—a pittance in global terms—caused the premium of international benchmark Brent oil futures to its U.S. counterpart to widen by a dollar in an hour.
It was a stark illustration of how finely tuned oil traders are to the ebb and flow of oil through Cushing, the world’s biggest storage hub and delivery point for U.S. crude futures, known as West Texas Intermediate (WTI) by the industry.
While it has always been critical for traders given its role as the delivery point, the focus on Cushing has rarely been greater after an unprecedented three-month drawdown in stockpiles that fueled talk of squeezes on immediate supplies and fears that oil in storage could be drawn to minimal levels.
As that decline is showing signs of slowing down or reversing, market players and analysts are even more focused on how much oil is stored at Cushing at any given moment. More importantly, they want to know how much of that oil is light sweet that can be delivered against New York’s futures contract.
A shortage of WTI and others oil grades deliverable against the contract can boost prices as the front-month nears expiry as players face being taken to delivery on their positions.
Yet calculating how much light sweet oil is stored in Cushing has rarely been more difficult to measure, despite the advent of companies using satellites and infra-red cameras to beat government reports.
The boom in U.S. and Canadian oil production and the race to build out transport options to get it to markets, first to Cushing and then later to the Gulf Coast refining center, has created a tangle of variables to track.
“It’s not a straight forward answer. It is even more difficult at Cushing due to the significant capacity, tanks and number of pipelines involved,” said David Auer at refinery consultants Turner, Mason & Co.
“Cushing is such a big place, with so many tanks, that a change in an assumption can make a big difference over all.”
Weekly snapshots of stored oil at Cushing are produced by the U.S. Energy Information Administration (EIA) and the American Petroleum Institute, while energy intelligence group Genscape provides twice weekly data on the hub.
But getting ahead of that data on a daily basis, or getting intelligence on the kind of crude in storage, is where traders can find a profit or avoid getting squeezed.
Over the past three years, pipeline capacity into Cushing has nearly doubled, outbound capacity has increased to move crude south to Texas and pipes have been built to move light sweet Texas oil directly to the Gulf Coast, bypassing Cushing.
Flexible rail and barge options that can be activated to take advantage of arbitrages when they appear, or redeployed quickly when they disappear, have sprung up.
Tank capacity has swelled as well, now up to 80 million barrels according to Reuters calculations from 46 million in 2012, to accommodate the new inbound flows.
In addition to the steady stream of light Texas or similar crude, Cushing is now receiving high volumes of heavier Canadian oil through the TransCanada Corp‘s 590,000 barrel per day (bpd) Keystone pipeline from Hardisty, Alberta, to Cushing.
Throwing heavy crude into the mix at Cushing has added a new level of uncertainty: No longer is it sufficient to know how many barrels are in storage; now traders must gauge how many of those are light, sweet barrels.
Total stockpiles at Cushing have fallen 17 million barrels over the last 14 weeks to under 33 million barrels thanks to new pipeline capacity, according to the EIA, which will not publish data this week due to the government shutdown. Genscape reported a build last week, however, which analysts say may be partly due to seasonal refinery maintenance crimping demand for oil.
How much of that is light sweet is unknown, stirring concerns that supplies of such crude could be approaching minimum technical storage capacity levels and leave no oil in stocks which could be delivered against the contract.
Ebb & Flow of Stocks
Currently, there are 13 pipelines bringing crude oil into Cushing with a total capacity of 1.7 million bpd, according to energy intelligence company Genscape, an increase of nearly 815,000 bpd over the past three years.
Out of Cushing, there are 12 pipelines running in all directions with a capacity of 1.5 million bpd, the data shows. But only one major line runs south to the Gulf Coast, the reversed 400,000 bpd Seaway line, which began operations in 2012 and is a joint venture between Enterprise Product Partners and Enbridge Energy Partners.
By the end of 2014 another 1.3 million bpd will be added to pipelines going in and 1.4 million bpd going out of Cushing, including an expansion of Seaway to 850,000 bpd by mid-2014 and the Keystone Gulf Coast line, according to an EIA report.
The start up this year of two major pipeline projects: Magellan Midstream Partners’ 225,000 bpd Longhorn pipeline that ships Texas crude directly to Houston and avoids Cushing; and the Seaway line, have caused the major drawdown in the hub’s stockpiles.
As it became clear that those lines can ease the Cushing glut, the Brent-WTI spread narrowed to virtually zero briefly in July. Although it has pulled back to $8.50 a barrel on expectations stocks may be set up for another build period. But the spread is well off February peaks of over $23.
Water & Rail
Throwing another curve ball into Cushing calculations is a system of trucks, barges and rail cobbled together in recent years to move crude from oil fields direct to refineries on the Gulf and East Coasts.
Waterborne shipments of crude between the Midwest and the Gulf Coast rose to a historic peak of over 125,000 bpd in June 2013, up from an average of 10,000 bpd in 2010, EIA data shows.
Traffic on rails also jumped, as part of an overall push to get new shale production to markets. Crude moved by rail jumped from 23,000 bpd in 2009 to 771,000 bpd in the third quarter of 2013, according to the American Association of Railroads.
The flexibility of these systems makes it a wild card for Cushing, such as the unexpected August restart of shipments from Stroud. The 90,000 bpd Hawthorn pipeline picks up crude shipped to Stroud by rail and sends it to Cushing.
As the Brent-WTI spread narrowed, signaling supplies of crude would be falling as Cushing inventories drained, this supply system was reactivated, sending more oil into the hub.
How Low Can They Go?
The plummeting stocks set up a big question for markets: How far can they drop before hitting minimum operating levels?
Such a level at Cushing, based on the amount of oil needed to be left to prop up tanks’ floating roofs, would be about 10 percent of total shell capacity, or 8 million barrels, said Mark Shaw, executive director at E3 Consulting LLC, an engineering firm that has reviewed Cushing tanks designs.
Magellan, the third largest storage operator at Cushing, confirmed that number.
But Shaw said operators add another several percentage points to their calculations of minimums to ensure their operations run smoothly. If they add another 10 percent, that would indicate a minimum operating level of 16 million barrels—or 20 percent of Cushing’s shell capacity.
“(How low inventories can go) really is the question because the bulls are pushing this mantra that Cushing is going to be drained. And it’s not unfounded but we need to know what is the ratio of light sweet to heavy sour presently in Cushing,” said one crude oil trader.
Estimates of the split vary wildly from 50-50 to 70-30, in favor of heavy. At the extreme end of the estimates—30 percent—that would point to light sweet inventories at Cushing at just below 10 million barrels.
Others, however, are more reluctant to estimate.
“The stocks that I care about, the WTI, we don’t really know the breakdown of those inventories. To me that means it’s impossible to know what a minimum operational level is,” said Jan Stuart of Credit Suisse. (Reuters)