The volume of oil sitting in 300 steel tanks in a nine-square-mile
radius in Cushing, Oklahoma has long been a key barometer for the health
of U.S. crude supply and the nation’s benchmark for daily trading of
billions of dollars in the commodity.
But those tanks
could soon drain to levels near effectively empty, even as U.S. oil
production soars past a new record of 10.4 million barrels per day.
Oil
supplies have fallen before in Cushing for a variety of seasonal or
market-driven reasons. But this time, there is no shortage of crude in
the market. In fact, U.S. production is straining pipeline and storage
capacity.
The declining volumes stored at Cushing reflects a more
permanent shift, underscoring the hub’s waning influence as the primary
measuring stick for the U.S. oil market and the leading barometer of
future supply, demand and prices.
(For a graphic of falling oil inventories at Cushing, see: tmsnrt.rs/2GRh5GR )
Companies
are now spending millions of dollars building infrastructure to
facilitate trading and storage elsewhere, such as in Houston and other
Gulf Coast ports.
That
could pave the way for a change in the U.S. benchmark oil price, used
to value tens of billions of dollars of crude and futures contracts
every day. The current benchmark - called West Texas Intermediate crude,
or “WTI” - has been derived from the price of physical oil delivered to
Cushing for more than three decades.
Traders and major global
crude buyers have advocated replacing WTI with a new benchmark futures
contract that would reflect the value of crude delivered to the Gulf
Coast.
The price of oil in Cushing - which bills itself as “the
pipeline crossroads of the world” - is used to value crude grades
produced around the United States and some oil imported from Canada,
Mexico, and South America. Prices at the hub also provide the basis for
an average of 1.3 million WTI futures contracts CL-TOT - worth about $82
billion at current prices - that change hands on the CME Group’s New
York Mercantile Exchange every day, making it one of the world’s most
actively traded commodities.
But as more pipelines are built to
take oil from U.S. shale fields to Gulf refineries or for export
markets, much of the crude produced in the giant Permian Basin oilfield
in Texas and elsewhere no longer passes through Cushing.
Instead,
producers are increasingly shipping directly to seaports such as
Houston, where vessels carry the oil to dozens of countries worldwide.
That reflects a major transformation in global crude flows since the
United States lifted a four-decade ban on oil exports in late 2015. Some
traders and buyers argue the benchmark needs to change to reflect this.
Joshua Wade, a crude oil marketer in Oklahoma, sees the benchmark delivery point moving south before long.
“That’s
the direction it’s moving,” he said. “As opposed to importing, now
you’re exporting through the same infrastructure ... The oil capital of
the nation is in Houston.”
Inventories in Cushing fell to 28.2 million barrels in early March, lowest in more than three years.
Analysts
say a level of 20 million barrels is effectively empty. That’s because
tank design necessitates a minimum volume of crude be kept on hand to
maintain the physical integrity of the complex and to allow for blending
different crude grades to comply with pipeline specifications.
“There
has been a major structural shift in crude flows within the U.S.,” said
John Coleman, senior research analyst at consultancy Wood Mackenzie. “I
think Cushing is rapidly losing its relevance.”
A CENTURY-OLD WAY STATION
Cushing
got its distinction in the early 1920s when tanks sprung up to store
oil en route from Oklahoma and Texas to major metropolitan areas and
refineries in the Midwest.
In 1983, it became the delivery point
for the newly-launched WTI futures contract CLc1. Because the U.S.
relied on imports - and banned exports - Cushing was key for traders to
gauge domestic supply trends.
BP’s former head of crude trading,
Donald Porteous, earned the nickname “the King of Cushing” because of
his deep understanding of supply logistics in the Oklahoma town - a
strategy that often earned him more money than BP Chief Executive Bob
Dudley.
Porteous, now retired, declined to comment for this story.
Now,
new pipeline projects head straight from west Texas to the Gulf of
Mexico, a route well south of Cushing. Lately, Permian Basin prices have
declined because pipelines can’t be built fast enough to get crude to
the Gulf, even as pipeline firms have added about 600,000 bpd in
capacity since late last year, according to data compiled by Reuters.
“We’re
trying to make sure we’re ahead of the pinch points for producers to
bring product to refiners or to export,” Greg Armstrong, chief executive
of Plains All American, said at a recent industry conference.
Projects
in the works could boost outgoing pipeline capacity from the Permian
from 2.7 million bpd in March to more than 4.5 million bpd by the end of
2019, according to energy industry information provider Genscape.
Meanwhile,
the Dakota Access pipeline started shipping oil last year, running out
of North Dakota’s Bakken shale region to the Gulf - bypassing Cushing.
And Marathon Petroleum is considering reversing its Capline crude line
to bring barrels from Illinois to the Gulf.
A BENCHMARK SHIFT?
For
now, traders watch the price differential between WTI and London-based
Brent crude to determine where to ferry shipments globally.
But
traders say the price of physical trades in Houston is growing more
important as a barometer for shippers. Earlier this year, even as the
WTI crude discount to Brent WTCLc1-LCOc1 narrowed, Houston’s discount to
Brent remained steady at about $1.60 a barrel, analysts said, helping
buoy export demand.
As pipeline capacity to the Gulf
has increased, and storage has expanded, demand to park barrels in
Cushing has waned, said Carlin Conner, chief executive at SemGroup Corp (SEMG.N), which operates about 7.6 million barrels of crude oil storage in Cushing.
SemGroup Corp (SEMG.N)
A
spokesman for Magellan Midstream Partners, which owns about 12 million
barrels of Cushing storage, said it will remain important because of its
connections to the Gulf and Midwest.
Cushing is also connected
via pipeline to the Gulf, 500 miles to the south, and can offer cheaper
storage than what’s available on the coast, said SemGroup’s Conner.
“I believe Cushing’s next chapter,” he said, “is that it’s going to become an offsite Gulf Coast storage center.”
Reporting
by Devika Krishna Kumar in New York; Additional reporting by Jessica
Resnick-Ault in New York; Editing by David Gaffen, Simon Webb and Brian
Thevenot
Our Standards:The Thomson Reuters Trust Principles.
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