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Page added on September 7, 2013
The Giant Sucking Sound: Why Is Oil Leaving Cushing’s Tanks So Fast?
In the last two months, traders and oil companies have been moving their crude oil out of the giant tanks in Cushing, Okla., faster than at any time in recent memory. Since late June, crude inventories at the country’s biggest oil storage hub have plunged some 40 percent, from about 50 million barrels to 34 million as of Aug. 30.
The drawdown effectively marks the end of an historic glut of crude that built up in Cushing over the past three years, as double-digit increases in domestic oil production overran the U.S.’s ability to move it around. “What this really reflects is the removal of the bottleneck and a rebalancing of the country’s pipeline infrastructure,” says Tim Evans, an energy analyst at Citigroup (C).
The pipeline industry has worked feverishly to reorient the country’s oil pipelines around new sources of domestic crude production in the middle of country. New pipes have been built and old ones reversed to get more crude out of places such as North Dakota and Oklahoma and into refining hubs along the Gulf Coast. That’s essentially the opposite of what they were intended to do, when increasing imports needed to be piped from the coasts to the interior of the country.
Last year, Enterprise Products Partners (EPD) and Enbridge (ENB)reversed the flow of the 500-mile Seaway Pipeline to take crude out of Cushing and into Freeport, Tex. After a slow ramp up, and some hiccups along the way, Seaway is now pumping about 300,000 barrels per day out of Cushing.
Oil from the Permian Basin in West Texas that used to flow into Cushing is now getting piped straight to refiners outside Houston. In April, Magellan Midstream Partners’ (MMP) Longhorn Pipeline reversed its flow and started moving crude from El Paso into Houston. In June, Sunoco’s Permian Express pipeline started moving about 90,000 barrels of crude per day out of Wichita Falls, Tex., and into Port Arthur.
In July, BP’s (BP) massive refinery in Whiting, Ind., restarted after a nine-month modernization process and is now funneling more crude out of Cushing.
Changes in the oil futures market have also killed the longtime incentive for traders to store oil in Cushing. Around late June, just when oil really started to pour out of Cushing, the West Texas Intermediate contract (the benchmark for domestic crude) switched from what’s called contango—a commodities term that means prices are expected to rise in the near future—and into backwardation, where prices are expected to fall.
During contango, a contract to buy oil a month from today costs more than the current price. As long as the price of oil is expected to rise in the future, there’s an incentive to store it and sell it for a higher price down the road. For the last few years, as WTI was in contango, oil traders with access to space in Cushing could sell futures contracts to lock in that higher price a month or two later and then just sit on it.
Now that futures contracts are selling for lower than current prices, that trade has reversed and storing crude now costs money. As a result, traders have spent the last two months moving their crude out of Cushing as fast as possible.
10 Comments on "The Giant Sucking Sound: Why Is Oil Leaving Cushing’s Tanks So Fast?"
shortonoil on Sat, 7th Sep 2013 4:24 pm
hThe chances of oil falling below $88/b are less than 2.5%. The chances of it rising above its current price are 100%.
bobinget on Sat, 7th Sep 2013 4:39 pm
Storage for the the last eight weeks of nine have shown a draw. IOW’s demand of ‘only’ 19.2 million barrels is stretching the system. Imports went up last week. At 11: Eastern check this link for current consumption.
http://ir.eia.gov/wpsr/wpsrsummary.pdf
times,dates:http://www.eia.gov/petroleum/supply/weekly/schedule.cfm
As for predicting future prices, leave that up to traders who need to think short term in order to raise steady cash flow.
LT trend is higher, that’s all you need to know.
Norm on Sat, 7th Sep 2013 4:53 pm
Well, something interesting about price of oil, is that it doesn’t just go up forever. The whole economy gets trashed by the high oil price. Then everybody sit home and cannot drive. Then price of oil go back down, a bit. So in the end, it will repetitively cycle up and down, about some high price. The price get high, then economic disaster, the price fall, a bit of economic recovery. So then it could do that anywhere between $75 and $150 a barrel. Ya think?
Norm on Sat, 7th Sep 2013 4:56 pm
If the oil is leaving Cushing, it says traders expect the oil price to fall. If oil prices are falling, this is an indicator the economy is slowing down. Perhaps link that to low scrap metal prices. That also suggests the economy is slow, or slowing. Not a match to the pom pom cheerleading, of the lamestream media.
GregT on Sat, 7th Sep 2013 6:17 pm
Oil price and economic volatilities were exactly what was expected to happen when Peak Oil was reached.
The undulating plateau is here and now. The question remains, will the collapse be long and drawn out, or rapid. At what cost per barrel of oil will modern industrial society cease to function? Or has that point already been reached?
shortonoil on Sat, 7th Sep 2013 7:45 pm
“LT trend is higher, that’s all you need to know.”
Petroleum prices have been following a complex exponential function for as far back as the records go. Geo-political events affect it short term, but it always moves back to the curve. The longest period on record that it has deviated from the curve was between 1998 to 2004. For seven years, it consistently stayed a little below the curve. It made up for the deficiency over the next three years. The correlation coefficient for 1960 – 2012 between the prices reported by the EIA, and the curve is 0.956. The curve was derived directly from a thermodynamic model of world oil production.
“The undulating plateau is here and now. The question remains, will the collapse be long and drawn out, or rapid. At what cost per barrel of oil will modern industrial society cease to function? Or has that point already been reached?”
We can tell you when the theoretical end point will be been reached. It occurs when the energy delivered from a unit of oil to the end consumer is no longer sufficient to support the economic activity needed to procure the oil. Following the idiocy that has been emerging from Washington recently, chances are that a geo-political event will bring about the end of the oil age sooner than theory predicts. As a civilization we have the power to literally bomb ourselves out of existence.
Luke on Sat, 7th Sep 2013 7:47 pm
When greedy traders suck down Cushing on expecting lower prices, the shale suckers in North Dakota and Texas might worry. Only high prices will allow for their dirty high cost extraction technology. If the price really goes down they are forced to leave their plays. It will impede the cheered US energy independency and fill up Cushing again with more oil imports.
J-Gav on Sat, 7th Sep 2013 7:50 pm
GregT – “The question remains, will the collapse be long and drawn out or rapid?”
Well, that’s basically the bone of contention between somebody like Ugo Bardi and his ‘Seneca Effect’ (i.e. shit falls apart a lot faster than it comes together) and say, the Archdruid, whose Catabolic Collapse theory postulates a more prolonged process (à la Roman Empire).
Who knows? Preferably, Greer’s scenario will prevail, giving time to the Green and other Wizards he calls for in order to ensure at least some form of human continuation on Earth. On the other hand, there are quite a few factors whose influence over the next decade no-one can predict with certainty (financial/economic armageddon; regional/global? conflict over pipelines, water etc; the evolution of climate change; the pace of viral and bacterial resistance to antibiotics; the possibility of regional or larger bio/eco/ocean system collapse(s) …
Interesting times, eh?
BillT on Sun, 8th Sep 2013 3:36 am
J-Gav, we definitely live in interesting times. When one wakes up in the morning one never knows what the day will bring. The number of ‘black swans’ in the flock overhead are almost blacking out the sun. Eventually one or more will tire and land and the world will change drastically in the blink of an eye.
For most of my life all we had to worry about was the propaganda about the ‘cold war’ which was mostly to build the Military Industrial Complex ever bigger. Now we have all kinds of disasters awaiting us every where we turn.
Sometimes I think being a dumb sheeple is the way to live, but you cannot delete all that you know about the real world like you can an unwanted picture on your PC. We have to live with it…
CAM on Sun, 8th Sep 2013 4:13 pm
Of course there is still a price gap between WTI (Think Cushing) and Brent (Think imported oil). Now that refiners can get WTI more easily, they will certainly buy that rather than Brent, at least until the price of WTI and Brent reach parity. When that happens we can expect that gas prices across the country will tend to be more equal, and world oil prices will more quickly impact average US prices. None of this will have significant impact on the coming oil decline.