Cushing, Oklahoma is a small city with a rich oil history. The background in oil and gas lead it to become a sort of mecca that many referred to as the “Pipeline Crossroads of the World” and the primary delivery point for light sweet crude to be traded as futures under NYMEX. Since then it has been a large hub used for the storage and transportation of oil and served as a solid indicator of the inventory levels of the United States. Lately, people have noticed something peculiar and it is not good news for consumers of energy.
Why Cushing?
In 1912 a Pennsylvanian wildcatter by the name of Thomas Slick Sr. struck a large gas deposit in Cushing Oklahoma. The resulting blowout shot fluid 40 feet into the air and allowed Tom Slick to continue drilling more and more wells that brought handsome returns. His nickname changed overnight from “Dry Hole Slick” to “King of the Wildcatters” as he eventually became the largest independent oil operator in the United States amassing a fortune estimated to be between $35 million to $100 million. Tom Slick was responsible for starting a boom that led to the rapid expansion of production and associated infrastructure. At its peak, 23 oil companies and 5 supply houses were located in the town along with more than 50 refineries. While the boom was great, it eventually ran its course as the last two refineries closed in the early 80s. This also killed the demand for rail service to the town. This left 39 storage tanks and pipelines with the capacity to move 1.5 million barrels a day allowing Cushing to become a central storage hub for vast quantities of WTI (90 million barrels to be exact).
Keeping an Eye on the Prize
Storage tanks in Cushing are notable for their floating tops. Folks from all around the world will keep their eyes on these tanks as they can get a good read on the general well-being of American oil supply. In order to do this, they will use satellite imagery to measure the shadows and use a mix of trigonometry and geometry in order to determine just how full the tanks are. The lower the level of the tank, the longer the shadow cast from the wall to the top of the tank. This is how people are able to keep a finger on the pulse of supply. If the tanks are low, the general idea is that supply in the states is low causing many traders to be bullish. If the tanks are full, like in 2020, folks become bearish on the commodity as it has become oversupplied. This is when oil is stored on floating storage or shipped to other parts of the world dirt cheap.
The Current State of Storage
Lately, the shadows on the tops of the floating storage tanks have been long. While just 2 years ago we were staring down the barrel of an oil glut, we are now in the midst of a potentially problematic shortage. The Russian invasion of Ukraine has boosted the world’s demand for US crude, and traders are acknowledging that more oil is being rerouted from Cushing to the Gulf Coast for export. Exports are up to 3.8 million barrels per day for the week of March 18 which is the highest rate of export since July of last year. This leaves stockpiles at about 25 million barrels or only 28% of capacity.
Typically this would cause Texas oil to trade at discount in order to attract more barrels back to Oklahoma and solve the shortage. However, Midland crude is trading at a 70 cent premium to Cushing barrels alluding to the fact that more people are trading oil straight out of the Gulf Coast. This implies that the situation may actually get much worse before addressing the supply issues. Even the spread between WTI and Brent (learn more about spreads here and here) is working against domestic storage. Right now Brent is about $6 more expensive than WTI which is a wide enough spread to incentivize the world to import US energy which is why US exports are back up to high levels.
While this all sounds terrible, keep in mind that the Cushing inventories have been slightly improving since March. While not yet out of the woods, 3 million more barrels of oil have claimed Cushing as a new home. With Chinese lockdowns and upcoming refinery maintenance, Cushing just might pack away some more oil. While good for the short term, the inventory levels are still more than 20 million barrels lower than they were this time last year. That’s a trendline with a negative slope. If the US continues to export at these high levels to service the world’s energy needs, things could get a whole lot more expensive. Even the Bank of America is alluding to $200 oil. The best thing the US can do is create an environment that promotes domestic production so that we may avoid an unnecessary shortage of energy.
References
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