Oil is flooding into US storage tanks at an unprecedented rate, leading traders to wonder how long the hub in Cushing, Oklahoma, can keep absorbing its share of the global supply glut. About half the surplus crude accumulating in tanks across the United States is flowing into Cushing. If the build-up continues at the same rate, some industry officials and sources said, the tanks could reach maximum capacity by early April. Others suggest the flow might continue until July before it tests the limits of the dozens of steel-hulled storage tanks clustered in mid-Oklahoma.
Traders have been scrambling to secure space at Cushing so they can store oil purchased at current low prices and sell it in a year at a profit exceeding $11 a barrel because the oil market has been in a structure known as contango. In January, crude oil arriving by pipeline and rail into Cushing, the delivery point of the US crude futures contract, jumped nearly 11 million barrels to nearly 42.6 million barrels, the largest monthly build since the US Energy Information Administration began tracking the data a decade ago.
On Thursday, data from energy information provider Genscape showed Cushing stocks rose a further 3.2 million barrels in the four days to February 10, the biggest such increase ever. Over the past 10 weeks, some 550,000 barrels per day (bpd) of crude have flowed into oil tanks across the United States, according to the EIA. That's approximately one-quarter of the current global surplus estimated by Opec.
Whether it happens in April or July, the implications of full storage tanks are clear: The excess oil will spill over into the wider market, further pressuring global prices that have recently stabilised following a seven-month dive. The build-up in Cushing has made demand look more robust than it actually is, artificially supporting prices, say traders.
"Once it's full, the market will puke," said one trader. The swelling of tanks is a reversal from seven months ago, when oil was flowing out of Cushing to sate thirsty refiners on the Gulf Coast, and traders were attempting to gauge tank bottoms rather than tank tops. In July, Cushing inventories fell below 18 million barrels, the lowest value in six years. Fast forwarding to February, global crude oil prices have tumbled by nearly 60 percent due to oversupply and lacklustre demand. The West Texas Intermediate oil complex has flipped into an increasingly deeper contango, with front-month crude selling at a deep discount to future months.
With the contango deepening, the flow into Cushing has quickened. Since reaching a low of under 19 million barrels in early October, stocks have risen by an average of 188,000 bpd, EIA data show. Since early December, the pace has exceeded 265,000 bpd, according to calculations. While Cushing has a nominal capacity of nearly 85 million barrels, the EIA only considers 71 million barrels as working storage, according to the most recent data available from September 2014. That amounts to about 84 percent of the "shell" capacity.
If stocks rise at the slower rate, they would not reach that level until July, according to Reuters calculations. According to Genscape, which monitors stock levels in Cushing, the utilisation rate has never exceeded 80 percent, suggesting a threshold around 67 million or 68 million barrels, says Brian Busch, Genscape's director of oil markets.
Some say usable capacity may be lower still. The 60 million barrel mark is a better indicator of "full" because of tank blending requirements, according to seven people who use storage space or analyse the tankage. If stocks fill at the faster rate, they would hit that level by mid-April. "Cushing is filling up at a pretty high rate and in two months, it will be full," Harry Pefanis, president and chief operating officer at Plains All American Pipeline LP said in a call with analysts last week. The firm owns nearly 20 million barrels of storage tank capacity in Cushing, more than any other company except Enbridge.
Traders are racing to secure storage space to capitalise on the contango. Medium-term lease rates have risen from 25 to 30 cents a barrel a few months ago to nearly 40 cents a barrel, according to executives from NGL Energy Partners, which owns over 4 million barrels of Cushing tanks. Philip K. Verleger, a consultant and energy economist who closely tracks storage economics, said he would not expect Cushing to fill until the end of May at the most recent pace.
There is ample storage elsewhere, however. In the Gulf Coast region, for instance, current stocks of 208 million barrels remain well below the area's capacity, which exceeds 330 million barrels. "If this continues, Gulf storage will not fill until the end of the year," he wrote in a report this week. Once Cushing inventories top 52 million barrels, their previous record high set in early 2013, it is an open question how much more oil can flow in.
Logistics around Cushing have grown more complex in recent years. Some pipeline flows have reversed from north to south; there is more varied crude quality with arrivals from the Canadian oil sands. Refiners have demanded that some tanks be used to create special blends, and a host of new companies own tanks. "The fact is, it's hard to know what the constraint is, at least without extremely distressed pricing," said Eric Lee, an oil market strategist at Citigroup.
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