Crude oil storage levels in Cushing, Okla., reached a record high last week as nationwide stockpiles continued to grow, fueling worry that storage capacity limitation will trigger a new slide in oil prices.
New data from the U.S. Energy Information Administration released yesterday show that the 54.4 million barrels of crude in storage at the "pipeline crossroads of the world" is the highest on record.
Following several years of infrastructure build-out, though, total storage in Cushing was just 77 percent filled, the agency said, a dramatic climb from a low of 27 percent utilization as recently as last October, but still below the 91 percent usage level seen in March 2011, shortly after EIA started tracking it.
Cushing is home to nearly 20 percent of the country’s commercial crude storage, EIA said, and full tanks there mirror a situation seen nationwide with inventories currently at 458 million barrels out of a total that may not be far above 500 million barrels.
Nationwide, commercial oil storage is up 9.6 million barrels over the last week — and 22 percent higher than a year ago at this time.
But storage rates in Cushing are particularly important because it is the delivery point from which the West Texas Intermediate (WTI) crude price benchmark is set.
WTI has traded at a discount of about $10 per barrel to the price of the European benchmark Brent over the past month, in part because of continued strong domestic production, and analysts worry that filling up the working storage capacity at Cushing will push oil prices down into the range of $20 per barrel as producers run out of places to stash the surplus.
Andrew Lipow, the president of Houston-based consulting firm Lipow Oil Associates, said in an interview that he expects storage in Cushing to reach about 65 million barrels by the middle of April. "That is, in my opinion, operationally full for Cushing, Okla., based on what’s in use there and how high we can fill," given the need for some working space to allow movement of product into and out of storage, he said.
Analysts debate what total working storage amount is available nationwide, but the total can be misleading because of transportation constraints. Storage that is technically available in Ohio, for example, doesn’t help a Bakken producer with pipeline access only to Cushing.
Still, EIA noted that new pipelines into and out of Cushing mean that inventory levels can swing more quickly than they could in the past. Week-to-week swings in recent months can run to 2.2 million barrels, while in previous years the swings were more often in the range of 0.5 million to 1 million barrels in or out, the agency said.
EIA said last week that the United States now has more days of oil supply than at any time over the last 30 years, based on expected March refinery runs.
"The big question is, how high can that 458 [million] number go?" Lipow said, referring to total domestic storage levels. "It’s my opinion … that the industry can store well over 500 million barrels … and possibly up to 525 million to 550 million barrels before we run out of tankage."
Storage rates will eventually fall if refineries start increasing their demand for crude, if Canada starts to export more oil to non-U.S. destinations or if a form of lightly processed crude oil called processed condensates is exported more, Lipow noted.
While raw crude cannot be exported from the United States, lightly processed condensates can be shipped as refined petroleum products if they meet certain requirements.
The Commerce Department’s Bureau of Industry and Security in January issued a policy update in the form of a new "frequently asked questions" section on its website that said companies could self-certify that their condensates met the guidelines for export, instead of requiring explicit rulings to that effect (EnergyWire, Jan. 6).
Some stakeholders have said that change has limited impact because the guidance remains murky, but Lipow said the change is significant and that processed condensate exports are already growing and will continue to increase over the next several months.
"More and more companies are willing to export without a private letter ruling," Lipow said, adding that shipments have increased from about 30,000 to 40,000 barrels per day at the end of last year, before the clarification, to 100,000 to 120,000 barrels per day now based on reported sales and ship sightings.
Joanne Shore, the chief industry analyst for the American Fuel & Petrochemical Manufacturers association, said the main factor driving current storage levels is the unusual contango price structure that puts a higher value on crude futures than on the present price (EnergyWire, March 19). But she said planned and unplanned refinery outages are also contributing to the storage glut.
Many domestic refineries have had shutdowns over the past weeks to shift equipment for the production of the summer gasoline formula, a slightly different fuel mix that accounts for seasonal emissions differences.
"Historically, when refiners went into maintenance, and when refiners relied on waterborne imports" of oil, they put a hold on those shipments for the duration of the shutdown, Shore said. "But with domestic production, that crude oil keeps coming down that pipeline," she said, leading to a buildup in stocks during maintenance.
"But the size of the stocks here, most people agree, is the world’s oversupply situation and the resulting contango market," she added.
Shore said that as gasoline demand picks up with the warmer months and refineries come out of maintenance, crude runs are expected to pick up somewhat.