OPEC’s nemesis
Crude oil inventories at Oklahoma’s Cushing hub are creeping near a record.
For OPEC, there are few enemies more fearsome than Oklahoma town of Cu shing.
With oil inventories at Cushing creeping near an all-time high, U.S. oils prices are struggling to advance despite the promised production cuts by OPEC, Russia and other producers. And the storage tanks are likely to stay full as refiners park crude in Oklahoma to lower their tax bills.
Cushing, which prides itself as the “pipeline crossroads of the world,” is the delivery point for the West Texas Intermediate crude contract. With tanks that can hold 77 million barrels of crude, enough to supply France for two months, it’s the biggest storage hub in the United States. The last high point there came in May. Now, after a brief hiatus, the tanks are filling up once again. For the OPEC-led efforts to boost prices, that’s a major problem.
“Part of what OPEC, and in particular the Saudis want to do, is drain the swamp,” said John Kilduff, a partner at Again Capital, a New Yorkbased hedge fund that focuses on energy .“To do that they will reduce deliveries to the U.S. That will eventually be felt at Cushing, but not in a long time.”
Closing in on the record
Stockpiles rose by 1.22 million barrels last week, following a 3.78 million jump the previous week that was the biggest since 2008. The inflows have pushed up stocks to 66.5 million barrels, within a whisker of the all-time record of 68.3 million set in May. With the promise of production cuts sending forward prices up, that’s encouraging traders and refiners to hold onto inventories, the last thing the Organization of the Petroleum Exporting Countries wants to see.
“The near-term prognosis for Cushing balances is not particularly rosy,” said Amrita Sen, chief oil analyst at consultants Energy Aspects.
Cushing is getting more oil partly because of seasonal factors. Every year, refiners in the U.S. Gulf Coast try to reduce inventories in December to lower their tax bills, traditionally parking excess crude in Oklahoma and elsewhere. Also, U.S. refineries typically process less crude at the beginning of the year, with January demand dropping by an average 899,000 barrels a day during the past five years.
Reductions in inventory by refineries in Texas and Louisiana “can contribute to outsized Cushing builds,” said Adam Longson, a commodities analyst at Morgan Stanley in New York
Small town
With just 7,889 residents, Cushing sits about 70 miles northeast of Oklahoma City. Over the years, it has developed into the key transfer point for oil flowing from West Texas and Canada to refineries in the U.S. Midwest and on the Gulf Coast. Since late October, Cushing inventories have increased by 8.1 million barrels, largely wiping out the 9.9 million drop from mid-May to mid-October.
The Cushing overhang is putting pressure on U.S. oil prices, which have given up their gains after last weekend’s historic deal between OPEC and non-OPEC nations. Oil fell on Thursday below $51 a barrel in New York trading, down from a peak of $54.51 earlier in the week. Oil settled at $51.90 a barrel Friday.
“This bearish price structure isn’t going away,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York.
The impact of the Saudi production cuts will take time as Riyadh is reducing output from January onward, and Saudi crude takes 45 days to arrive to the U.S. after sailing from the Middle East and around Africa.
“Part of what OPEC, and in particular the Saudis want to do, is drain the swamp.” John Kilduff, a partner at Again Capital