Cushing Approaching Record Storage

Jim Brown
 
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Cushing Oklahoma is the delivery point for WTI futures and inventories there have risen to 49.2 million barrels and only 3 million below the record from April 2013.

Genscape has been monitoring storage levels at Cushing since 2009 and even when there was record storage in 2013 the levels never exceeded 80% of capacity. As of February 27th it was 63%.

I have written about this before. Tank farms need to keep about 20% of their capacity available for transferring oil, blending and for operational reasons. Cushing has named capacity of 82 million barrels. That means it has the equivalent of (274) 300,000 barrel tanks. Obviously they need to keep a certain number of tanks empty and available for daily operations. Also, you can bet every tank is not filled right to the brim. Some may be but most are probably halted at less than capacity.

Cushing has been around for a long time and some of those tanks are really old. Filling them to the top is asking for trouble. Even brand new tanks are rarely filled over 90% in order to allow for expansion and contraction from outside temperatures.

Genscape (Genscape.com) believes Cushing will reach capacity as early as mid-April to mid-May. Since oil consumption increases in April and May the rapid increase in inventories will slow.

Even if Cushing is not full but nearing the 70% capacity the demand on storage at that location may decline as prices fluctuate. Traders need at least a $5 cushion between their buy price of current month futures and their sell price for the next month in order to make a profit. Storage at Cushing is being quoted at $2 a barrel today. That is $1.50 above normal. If the futures prices don't allow for the spread the storage demand from speculators will decline. The April contract is currently $49.62, May $51.20 and June $52.95. There is not enough spread today to make speculation worthwhile.

Storage capacity at the Midland Basin terminals where Permian production is shipped rose to record levels last week at 68.5% of capacity compared to 34% just two months ago. The Midland terminals is at 78% capacity and the record of 83% could be surpassed over the next two weeks. Over 80% cuts into that 20% operational threshold and begins to limit normal operations.

The picture below is from Genscape.com and shows three brand new 270,000 barrel tanks that were empty two weeks ago and were quickly filled to the 90% level. The tops float on the oil to eliminate the space for fumes to collect and the potential for an explosion.


Active Rigs

Active drilling rigs declined -75 to 1,192 for the week ended on Friday. Oil rigs declined -64 for the week to 922. Active gas rigs fell -12 to 268 and a new 18 year low. Active rigs have now declined -739 since the high of 1,931 in September. That is a -35.7% drop.

Other than during the financial crisis the number of active rigs has been above 1,700 since the beginning of 2006. We are poised for a significant decline, possibly to less than 1,000.

Baker Hughes warned that in those previous oil declines of 50% or more the active rig counts declined by 40% to 60%. So far we are only down -36% so we still have a ways to go. A 50% decline in oil rigs would be -805 from the 1,609 peak on October 10th. So far we have declined -687 oil rigs so we could lose another 150 or more before it is over.


Oil Inventories

Crude inventories rose another 10.3 million barrels to 444.4 million and the highest level for February since 1930. Crude inventories have risen +62 million barrels over just the last 8 weeks. Inventories are 22.1% over year ago levels and 25.2% above the five-year average.

Refinery utilization fell to 86.6% last week from 87.4%. Imports rose from 7.3 mbpd to 7.4 mbpd. U.S. production rose +39,000 barrels to 9.324 mbpd and the highest level since 1972.

Cushing inventories rose +500,000 million barrels to 49.2 million and a 6-year high.


Gasoline inventories were unchanged at 240.1 million. Gasoline demand fell -286,000 bpd and imports rose +71,000 bpd. Demand was probably down due to the severe weather.

Distillate inventories declined -1.7 million barrels to 122.0 million. Demand fell -229,000 bpd. Imports increased +14,000 bpd. The drop in distillates was unexpected given the number of airline flights that have been cancelled over the last two weeks.

In the graphic below green represents a recent high and yellow a recent low.


Propane inventories declined by -4.17 million barrels to 55.07 million. Demand rose to 1.77 mbpd. The cold weather has definitely had an impact on propane demand.

Natural gas inventories declined -228 Bcf to 1,710 bcf. Inventories are now -7.7% below the five year average of 1,853 Bcf and +40.4% above year ago levels at 1,218 Bcf.

The blue line in the chart below shows the current inventory relative to the five year average.


Market

The market took the week off and Friday was punctuated by a dramatic -300 point Dow decline after the Nonfarm Payrolls came in much stronger than expected. Monday will be the key this week. If the decline continues critical support levels will be broken and that could set us up for a significant drop ahead of the FOMC meeting the following week.

Jim Brown

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