Abstract
There is a strong inverse relationship between crude storage levels seen at the Cushing, Oklahoma facility and WTI futures price. This relationship exists even though the storage facility only holds a percentage of total domestic crude inventory. In fact, data suggests that in order for crude prices to stabilize above $55 per barrel, inventory in Cushing will need to drop below 47.5 million barrels, or about 62% storage utilization at the facility.
Introduction
West Texas Intermediate (WTI) is the main oil benchmark for North America as it is the futures contract traded for most of the production in the United States. The contract is tied to physical delivery at the storage facility located in Cushing, Oklahoma. Most of the crude flowing through Cushing in recent years has been primarily from wells in the Permian Basin. Much of the oil comes from Texas and then travels through pipelines to refineries in the Midwest and the Gulf Coast region. The Cushing delivery system consists of 24 pipelines and 15 storage terminals housing 90 million barrels of storage capacity and accounts for 13% of U.S. oil storage [1]. The inbound and outbound capacity is 6.5 million barrels a day which is why Cushing is known as “The Pipeline Crossroads of the World” [1]. As a result, the futures price of WTI crude is very well correlated to the inventory at Cushing, even though the storage facility only holds a percentage of total domestic crude inventory. For crude prices to break and remain above $55 per barrel, inventory in Cushing will need to drop below 47.5 million barrels or about 62% storage utilization at the facility.
Defining Storage
The EIA makes an important distinction between shell capacity and working capacity. Working storage capacity excludes the bottom section of the tank which is inaccessible since a minimum level of crude is required for proper operation of the outlet pumps and the very top portion of the tank usually has a gas blanket for safety reasons. The term also accounts for normal operational factors that limit storage capacity. As a result, only about 85% of the tank’s total theoretical/design volume, or shell capacity, is actually usable space known as working capacity [2]. Utilization rate is a percentage of usable tank volume currently occupied by oil inventory, or stock, calculated by dividing crude volume in the tank by working capacity.
The U.S. Gulf Coast region, home to more than half of U.S. refining capacity, typically has the highest level of crude oil inventories as its working storage capacity dwarfs every other region. From March 13th to April 24th, Gulf Coast inventories increased by 36.4 million barrels (20%) to 221.6 million barrels [3]. The increase of 10.2 million barrels in the week ending April 10th was the fourth-largest increase in the Gulf Coast region on record [3]. While the Gulf Coast region has the highest crude inventory of all regions, its utilization rate is amongst the lowest, especially compared to the utilization levels currently seen in Cushing, Oklahoma.
Cushing Storage
Inventories at the central crude oil storage hub in Cushing, OK increased by 24.9 million barrels (69%) from March 13th to April 24th [3]. The weekly inventory builds in Cushing for the weeks ending April 3rd, 10th, and 17th are the three largest weekly inventory builds on record [3]. Since market participants holding WTI futures contracts must take physical delivery of crude oil in Cushing, the availability of storage on site is important to facilitate the physical transfer. On April 20th, 2020, the scarcity of available crude storage at Cushing meant several market participants sold their futures contracts at negative prices, in effect paying counterparties to close out the contracts for them to avoid taking physical delivery with nowhere to store it [3].
Figure 2 shows there is not a perfect inverse relationship between Cushing crude stocks and WTI futures prices, but there is a strong trend. Since the main delivery and price settlement point for WTI is Cushing, the amount of storage being utilized in Cushing at any given time relates to price. When WTI futures contracts skyrocket, more oil is sold and as a result storage is driven down. When prices crash, storage levels begin to increase as more oil is deferred into storage with hopes of future price increases. The reverse is also true. When additional production or a drop in demand is experienced, a surge of crude boosts storage levels. This causes prices to be driven down to limit incoming production. When storage levels begin to drop, prices are raised to induce an influx of production.
The general trend of crude stocks at the Cushing hub inversely follows WTI futures contract pricing, but working capacity volumes have also increased over time. This is because domestic production has dramatically increased in the past decade while storage capacity at the Cushing facility has only increased about 50% during the same time period [2]. Because Cushing is the main delivery and price settlement point for WTI, it makes sense for crude utilization levels to increase as domestic production outpaces the construction of additional capacity.
Other Regions
Recent declines in demand for petroleum products have contributed to record increases in U.S. commercial crude oil inventories. Transportation fuel demand has decreased as a result of reduced economic activity and stay-at-home orders aimed at slowing the spread of the novel coronavirus [1]. Refiners have been able to reduce the amount of material they run through refineries (as measured by gross inputs, which includes crude oil, unfinished oils, and natural gas plant liquids) relatively quickly in response to falling demand, but crude oil production has not responded as quickly, leading to large crude oil inventory increases.
From March 13th (the day President Trump declared a national emergency in the United States due to COVID-19) through April 24th, U.S. commercial crude oil inventories increased by 74 million barrels (16%) and are now 8 million barrels below the record-high value set in March 2017, according to data from the EIA [3]. Domestic crude production increased in 2017 by more than 384,000 barrels per day (b/d) to 9.2 million b/d, driven by Lower 48 onshore production (especially in the Permian Basin) with an estimated increase of nearly 330,000 b/d from 2016 to 2017 [2]. Without any global demand surge, more crude flowed into storage and raised the days of supply to its highest point in history. Figure 4 shows incoming crude outpacing new storage construction as recent events in 2020 led to the days of supply surpassing the 2017 peak.
The world is experiencing a similar situation to the supply build seen in 2017 but instead of a surge in production, it is the decimation in demand causing storage levels to increase across all regions. While all regions have experienced similar storage surges in the past few months, the only other storage area that has a similar correlation to storage capacity and price is the Midwest region (which contains Cushing, OK) and the Gulf Coast region (with the largest working storage capacity and second lowest utilization). As Cushing is the main delivery and price settlement point for WTI with a majority of its oil coming from the Permian Basin, it is not surprising this is a major region where storage is directly influencing WTI futures contract pricing.
Ideal Balance Point
A segment of Figure 2 during the period from April 2009 through April 2014 is shown in Figure 5 which highlights an equilibrium point for storage and price levels at the Cushing hub.
During this time there were obviously price and storage fluctuations as supply and demand worked its magic, but there was a steady equilibrium point where price and storage held a fairly constant level. Today, when the world begins to return to normal and demand is restored, storage levels will begin to drop quickly. This is due to worldwide crude production shut-ins that will take time to bring back to pre-pandemic levels. If history is any indicator, the crude stocks in Cushing needed for a stable oil price at $60 per barrel is around 40 million barrels of oil.
Figures 6 and 7 show a comparison of percent utilization of working storage to the WTI price for Cushing and total U.S. crude stocks. The dataset includes weekly information since the EIA began tracking working storage capacity in March 2011. For both the Cushing and U.S. plots, a correlation doesn’t exist when oil price is above ~$80 per barrel or below ~$35 per barrel. This is likely due to the fact that at oil prices over $80, other market forces begin taking effect that have a larger impact than storage utilization. There is also not a very large dataset for oil price under $35 per barrel since 2011. Due to the dual black swan events in 2020, where most sub-$35 points occur, much larger effects on supply and demand than storage utilization have occurred for these points in the dataset than in previous years.
A correlation can be seen in the dataset for WTI crude prices between $80 per barrel and $35 per barrel for Cushing utilization and between $80 per barrel and $30 per barrel for total U.S. utilization. Figures 8 and 9 show these two trends with a trendline and associated linear equation.
While the data is not perfectly correlated, there is a relationship between utilization and price. Some other factors that may influence this correlation are major geopolitical events, economic swings, OPEC+ influence, and seasonal trends. Using the Cushing and U.S. trend lines, a theoretical crude stock estimate and utilization can be generated at various WTI price points. Table 1 shows these theoretical values between $40 and $65 per barrel. The trend loses accuracy for Cushing below $45 per barrel, since the theoretical utilization is higher than actual working capacity, but becomes more accurate in the utilization range from 50% to 85%.
Utilizing the trendlines from Figures 8 and 9, Table 1 shows the ideal balance point of storage and WTI oil price based on historical data since 2011. WTI price should stabilize in the $45 to $65 per barrel range with the most balanced point at $55/bbl if Cushing storage is held around 47,500 MBBL or 62% utilization. When prices dip below these levels theoretical utilization of storage skyrockets, and when prices rise above these levels utilization drops as additional crude is sold in the market.
Table 2 shows the average of weekly WTI price and actual utilization per year compared to what the theoretical utilization would be at that price. When these theoretical values are compared to historical numbers, the data is usually within a 5% margin. The exception is storage utilization in 2020 due to the Saudi-Russia price war and COVID-19 which has upended crude supply and demand.
Conclusion
As Cushing, OK is the main delivery and price settlement point for WTI prices, the futures price of WTI crude is strongly correlated to the inventory levels at Cushing. This relationship exists even though the storage facility only holds a percentage of total domestic crude inventory. When storage levels at Cushing begin to rise, prices fall, and as prices fall the inventory levels are drawn down. A brief overview of trends from 2009-2014 in Figure 5 shows a general stable equilibrium level to keep crude prices in the $60/bbl range if Cushing crude stock is approximately 40 million barrels. This is corroborated from historic price and utilization data in Figures 8 and 9. The utilization trendline shows that at 62% crude utilization in both Cushing and the total U.S., prices should remain stable at $55 per barrel. Currently the utilization would equate to about 47.5 million barrels of oil in Cushing and about 406.4 million barrels of oil stored throughout the U.S., not including volumes in the Strategic Petroleum Reserve.
A step change to this trend may appear as lower prices ushered into effect by the dual black swan events in 2020 add more data to the lower price ranges. As the oil and gas industry continues to live in a “lower for longer” price environment through 2020 and into 2021, a function for crude utilization compared to oil prices below $40 per barrel may become apparent. Historically however, when oil becomes volatile on both the high and low ends of the futures price spectrum, other market forces tend to step in and have greater influence on the product than utilization of physical storage.
References
[1] https://www.investopedia.com/terms/w/wti.asp
[3] EIA, Crude Inventories, https://www.eia.gov/todayinenergy/detail.php?id=43555
[4] EIA, Stocks of Crude Oil, https://www.eia.gov/dnav/pet/pet_stoc_wstk_a_epc0_sax_mbbl_w.htm
[5] EIA, Crude Oil Days of Supply, https://www.eia.gov/dnav/pet/pet_sum_sndw_a_EPC0_VSD_days_w.htm
[6] EIA, Weekly U.S. & Regional Stocks and Working Storage, https://www.eia.gov/petroleum/supply/weekly/wcrudeoilstorage_notice.php
[7] EIA, WTI Crude Futures, https://www.eia.gov/dnav/pet/pet_pri_fut_s1_d.htm
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