Bulging inventories are expected to continue to build at the biggest US oil-storage facility, putting more downward pressure on crude prices and adding to calls on the federal government to legalize exports, analysts said.
The amount of oil stored at the Cushing Hub in Oklahoma rose to 48.18 million barrels in the week ending Feb. 13, nine percent higher than a week earlier, bringing reserves to 59 percent of the 81.43 million barrels in total operational capacity, according to Genscape, an energy market data provider that reports on Cushing inventories twice weekly.
The increase was the biggest weekly gain since May 2009, and brought the total inventory level to its highest since July 2013, said Hillary Stevenson, Genscape’s Manager, Supply Chain Network. The data were the most recent that are publicly available.
The strong gains are being driven by contango, in which oil traders bet that they will be able to sell stored oil at a higher price in future than they can now, with global crude prices near historic lows. The current 12-month contango spread of about $11 is at its highest since 2011, Stevenson said.
At the current average weekly build of 2.2 million barrels, Cushing will reach operational capacity sometime between mid-April and mid-May, depending on inflows and any changes to capacity, Stevenson said.
The recent buildup of stocks is likely to continue given plentiful supplies on the world market, she said.
“It does not seem like OPEC is going to cut their production numbers, and we are seeing continued production from the US shale plays, so all of those factors keeping prices depressed currently are supporting contango,” she said. “As long as we have a contango scenario that facilitates storage economics, we will see storage continue to build.”
If Cushing does reach capacity, oil storage could be shifted to a number of locations on the Gulf Coast, where refineries and storage facilities have a total capacity of 52 million barrels, or offshore where the Louisiana Offshore Oil Port, or LOOP, can take up to 63 million barrels, Stevenson said.
Oil would be moved to the other facilities via a combination of pipelines and tankers, she said.
Among individual companies reporting the Genscape data in the latest week, by far the closest to capacity was JP Energy, an energy movement and storage company, whose reserves occupied 94 percent of its available space, followed by Centurion and Blueknight with 68 percent and 65 percent of capacity, respectively.
The capacity crunch has the potential to prompt another retreat in crude prices as downstream players seek alternative, and more costly, storage facilities such as trains and barges, analysts said.
And it will revive the national debate over whether to legalize US crude oil exports as a way of aiding producers who are struggling to deal with the sharply lower prices.
The shortage of storage capacity is likely to add to downward pressure on crude prices, argued Malcolm Turner, chairman of Turner Mason, Dallas-based consulting engineers to the energy industry and other clients.
People “will pay less to buy crude if it costs them more to store,” he said.
But any price decline resulting from alternative storage is unlikely to be dramatic, he said.
“It will definitely have a diminishing price on domestic crude but I don’t think it will be as great as some people say. We are not going to see a sudden catastrophic fall in crude prices.”
The oil industry is clearly getting close to “filling up Cushing,” Turner said. But that doesn’t mean some reserves will get shut in, since there is plenty of storage capacity available elsewhere, albeit at higher prices.
“There’s always going to be more capacity for storage somewhere,” he said. “On the Gulf Coast there’s ample storage and in every refinery there’s storage.”
As US producers look for new customers to buy surging domestic production, oil companies are unlikely to find overseas markets because the longstanding ban on crude oil exports is likely to remain in place, and so pressure on storage facilities will remain,Turner predicted.
He argued that the prospect of higher prices for crude that would follow any lifting of the export ban is likely to deter US lawmakers from taking that step because of the political fallout from the higher retail gasoline prices that would follow.
“I don’t think there’s a chance that US exports will be legalized,” Turner said. “Consumers of gasoline will tell their Congressmen and Senators, ‘I don’t think that’s a really good idea.’ Consumers do not like high gasoline prices, and they generally believe that exports of crude oil help raise prices of gasoline.”
But Michael Lynch, president of Strategic Energy and Economic Research, argued that exports will be legalized because pressure on the government to help oil producers will overcome political concerns about higher gasoline prices.
“Economics will trump politics,” Lynch said. “With low oil prices, there’s not much pain inflicted on the consumers in the worst-case scenario whereas the benefit to the producers is significant.”
Lynch predicted the US benchmark WTI crude will drop $3-4 a barrel if Cushing reaches its capacity, and that the differential with Brent, the global benchmark, will widen.
He said reserves are unlikely to get shut in, with the possible exception of the crudes that are the most expensive to produce, such as some of those in North Dakota, but that there will be further cuts in drilling in response to Cushing’s capacity topping out.
Photo Credit: Shutterstock (oil storage tanks)
