This article was originally published on RBN Energy by Sandy Fielden.
Cushing crude oil inventories have fallen by 28 percent from 42 MMBbl on January 24 to less than 30 MMBbl on March 14, 2014 according to Energy Information Administration (EIA) data. Since the startup of TransCanada’s Cushing Marketlink pipeline at the end of January, outgoing crude pipeline capacity has exceeded inbound supplies at Cushing and the surplus has been headed to the Gulf Coast. Backwardation in the futures market has also encouraged shippers to move supplies out of storage. Today we begin a new series looking at the Cushing exodus and the resultant growing Gulf Coast stockpile.
We have previously blogged about Cushing crude inventory levels – most recently in August of 2013 (see “The Cushing Floodgates Open”). Cushing is the largest crude storage hub in the US (excluding the strategic petroleum reserve) with a nameplate capacity of about 76 MMBbl (source: Genscape) owned by 14 different private companies. Cushing is also the most active oil trading hub and the delivery point for the CME NYMEX West Texas Intermediate (WTI) Futures contract. WTI also acts as a benchmark for US domestic crude pricing (see The Cost of Crude at Cushing Part 1 and Part 2). There are significant flows of crude into Cushing along pipeline routes from Canada, Chicago, the Rockies, the Anadarko basin and the Permian Basin and significant outbound flows on pipelines to refineries in Ohio, Oklahoma, Kansas and Texas as well as major trunk lines to the Gulf Coast.
The dramatic increase in US domestic crude oil production in the past 3 years meant the Cushing hub became the center of an inventory roller coaster as new supplies searched for routes to market. Figure #1 below shows EIA Cushing crude stocks over the period from the start of 2012 through last week (March 14, 2014). At the start of that period Cushing inventories increased from 28 MMBbl in January 2012 to a record 52 MMBbl a year later (green dotted oval on the chart), largely as a result of an excess of supply over refinery capacity in the Midwest. Those excess supplies came from new domestic production in North Dakota and the Rockies as well as increased Canadian output. The crude surplus could not find it’s way to Gulf Coast refineries because of a lack of pipeline capacity south from Cushing.
By mid-2013 as new pipeline capacity opened up from Cushing to Houston and direct from the Permian Basin in West Texas to Houston (bypassing Cushing) and as increasing volumes of crude were shipped to Gulf Coast refineries by rail and barge, the Cushing stockpile drained to less than 33 MMBbl between January and September 2013 (orange dashed oval on the chart). Then Cushing inventories increased again by about 10 MMBbl in the final quarter of 2013 and early 2014 as producers increased shipments into Cushing ahead of the opening of the southern leg of the Keystone Cushing Marketlink pipeline (purple dotted oval on the chart).
Figure #1 Source: EIA data from Morningstar
But ever since the Marketlink pipeline came online at the end of January 2014 and began to ship about 300 Mb/d of crude to the Nederland terminal at Port Arthur, TX on the Gulf Coast, stocks at Cushing have fallen again sharply. They fell by 12 MMBbl from 42 MMBbl on January 24, 2014 to less than 30 MMBbl on March 14, 2014 (red arrow in Figure #1). And there is general agreement about the destination of diminishing Cushing supplies – the Gulf Coast. As Cushing inventories have fallen since the start of the year, so Gulf Coast crude stocks have increased - by 33 MMBbl or 20 percent from 161 MMBbl on January 10, 2014 to 194 MMBbl on March 14. We will cover that increase in Gulf Coast crude stocks next time in this series but today we concentrate on why Cushing inventories are draining away.
First of all there has been a price incentive for shippers or owners holding crude at Cushing to bring their crude out of storage. That price incentive is caused by backwardation in the futures market. We have described backwardation – where prices in the future are lower – and its opposite, contango – where prices in the future are higher than today, previously (seeCrude Oil Blues and Record Stocks). At the moment (March 21, 2014) CME NYMEX futures prices for prompt WTI (delivered in May) are $1.71/Bbl higher than they are for delivery two months further out in July. Falling prices in the futures market indicate market sentiment believes physical cash crude prices will be lower in the future. Generally backwardation is a signal to take crude out of storage and sell it today before it loses value. Figure #2 below shows that prompt delivery WTI futures have been in backwardation ever since the middle of January 2014. The blue line represents the discount of WTI prices for delivery three months out compared to prompt delivery.That backwardation has averaged $1.28/Bbl since January 16 – more or less the whole period that Cushing inventories have been falling.
Figure #2 - Source: CME data from Morningstar
The second reason that Cushing stocks have been falling since mid-January is because outgoing pipeline flows have exceeded the level of incoming crude. This might seem obvious (how else do stocks go down?) but greater outbound flows are not possible if the pipeline capacity does not support the flow. Don’t forget that when pipeline capacity out of Cushing to the Gulf Coast was negligible at the start of 2012 the inventory kept building regardless of the desire of shippers to get their crude to the Gulf Coast, because there was no capacity available. So the reduction in Cushing inventory since January has been supported by new outbound capacity – particularly the Cushing Marketlink pipeline to Nederland on the Texas Gulf Coast that came online at the end of January 2014 flowing at about 200 Mb/d initially and now up to around 300 Mb/d with ultimate (nameplate) capacity for 700 Mb/d. This outbound pipeline from Cushing was originally designed as the southern leg of the Keystone XL pipeline from Alberta to Cushing. While the northern leg of the Keystone XL is still awaiting Presidential approval – now expected at the end of 2014 meaning it won’t be built until at least 2016 - outbound capacity from Cushing is effectively 700 Mb/d higher than inbound capacity. As well as the Marketlink pipeline, outbound flows from Cushing to the Gulf Coast have also been building up on the Seaway pipeline that has current nameplate capacity of 400 Mb/d and has recently been flowing at about 330 Mb/d. Genscape data show that these two pipelines account for the majority of outbound flows from Cushing.
At the same time, key incoming pipelines to Cushing are running close to full capacity even as stocks are draining away. As we described recently (see Eight Bucks Low in the Permian) surplus crude production in West Texas exceeds space on the pipelines out of that region – including the Basin and Centurion pipelines into Cushing. The Enbridge Spearhead pipeline bringing crude into Cushing from Flanagan (Chicago) has also been running close to full capacity under pressure from growing production in Alberta. The White Cliffs pipeline from the Denver Julesburg Basin in the Rockies is also running close to full at about 65 Mb/d. The incoming (original) Keystone pipeline from Hardisty, Alberta to Steele City, NB can deliver its 590 Mb/d to Cushing and/or Patoka, IL. That means volumes into Cushing on Keystone fluctuate as shippers decide whether to send supplies to Cushing or Patoka. So while this pipeline has also been operating at close to capacity not all its volume comes to Cushing.
We can estimate the net daily outflow of crude from Cushing from the EIA data by dividing the stock drawdown of 12 MMBbl over the past nine weeks to arrive at a daily average 214 Mb/d – at which rate the remaining 30 MMBbl stockpile would theoretically take about 5 months to drain completely. That rate of flow does not take into account about 400 Mb/d of outbound nameplate capacity on Marketlink not being used at the moment as well as about 70 Mb/d on Seaway. And Cushing outbound capacity will increase again with the expected early June 2014 addition of the Seaway twin pipeline that will add another 450 Mb/d to the Cushing-Texas faucet. So the draw down could speed up later this year.
Fortunately for Cushing storage owners, before all their customers empty out the tanks, there should be “incoming” relief flows that help to slow down the exodus. These will come in the shape of the 585 Mb/d Enbridge Flanagan South expansion expected online in mid-2014 to bring more crude from Chicago (likely to be mostly Canadian heavy) and the 230 Mb/d Tallgrass Pony Express reversal expected online in August 2014 bringing in more crude from Guernsey, WY (likely Niobrara, Bakken and Canadian supplies). These incoming additions will help to balance the outbound bias in Cushing pipeline capacity but they will not stop the exodus for long if the market continues to reward shippers for moving their crude to the Gulf Coast.
And that is where we go next in this series – to look at the build up of crude at the Gulf Coast from Cushing, the Eagle Ford, and the Permian and by rail from the Bakken and the Rockies. We’ll ask whether the Cushing exodus can continue and if the flood of new supplies could overwhelm Gulf Coast storage?