By Dan Strumpf
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--It took a fluke Texas snowstorm to reverse the rise of oil inventories in Cushing, Okla. But with a new pipeline carrying even more crude down from Canada, not even a blizzard is likely to turn back the flood of oil into the crucial storage hub for long.
Cushing's inventories declined by 900,000 barrels from record levels last week, according to U.S. Energy Information Administration data released Wednesday. The 37.4 million barrels in storage as of Feb. 4 represents 82% of working capacity, according to the EIA.
Oil traders are watching Cushing closely, as it's the delivery point for the crude oil underlying the New York Mercantile Exchange's oil futures contract. Cushing's glut has kept the price of Nymex futures about $15 below the other main global benchmark, which isn't tied to Cushing.
The reduction isn't likely to persist. This week, TransCanada Corp. (TRP, TRP.T) said it had completed the expansion of its Keystone pipeline and begun deliveries of Canadian crude to Cushing. With limited places to send the oil, much of that extra Canadian crude is likely to wind up in storage tanks there. Keystone is bringing about 130,000 barrels a day to Cushing, or about 900,000 barrels a week, TransCanada spokesman Terry Cunha said.
Oil market participants shouldn't read too much into one week's numbers, said Doug MacIntyre, who oversees the EIA's weekly inventory survey. The longer term trend has shown gradually increasing supplies at Cushing, he said.
"Having a one-week draw here and there is not too unusual," MacIntyre said.
Last week's decline was likely one such aberration. Fierce winter storms pounded the areas that send oil to Cushing, leading to problems pumping oil and sending it to the oil depot.
"The gathering system in West Texas and New Mexico couldn't operate in the ice storm," said Andy Lipow, a Houston-based consultant to oil refiners and traders. "[Refiners] just drew out of Cushing."
Bob O'Sullivan, who heads the Tulsa, Okla.-based oil and gas producer Sullivan & Co., said sub-zero temperatures and heavy snowstorms kept many of his wells in Northeast Oklahoma from pumping last week.
"The oil thickens up and gets to be highly viscous and can't get through some of the apertures," he said. "The equipment backs up."
O'Sullivan said his company's production, usually 600 barrels of oil equivalent a day, was slashed by 40% over the course of about six days due to weather. At least some of that oil typically goes to Cushing, he said.
Enterprise Products Partners LP, which transports crude and owns storage tanks in the Cushing area, saw a "short-term impact" from last week's weather, including difficult driving conditions for trucks carrying oil to Cushing, spokesman Rick Rainey said.
The surprise decline briefly caused Nymex futures, based on West Texas Intermediate light, sweet grade crude oil, or WTI, to trade at a narrower discount to Brent futures, the benchmark used in Europe and Asia. But the gap has since widened to about $15 a barrel, indicating that market participants are skeptical that more draws are coming, especially with the Keystone pipeline extension now online.
"I think the expectations are that the problems are going to continue" at Cushing, said Matt Smith, an oil analyst at Summit Energy in Louisville, Ky.
Meanwhile, the landlocked oil town lacks a pipeline to send oil to refiners on the Gulf Coast, which many analysts say is necessary to relieve the bottleneck. TransCanada plans to build a pipeline that would start carrying oil between Cushing and the Gulf, but not until 2013.
-By Dan Strumpf, Dow Jones Newswires; 212-416-2818
dan.strumpf@dowjones.com.
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