The Oklahoman | by Jack Money | Aug 18, 2018
CUSHING — Operators of the massive oil storage terminal here have done a great job of eliminating a storage bottleneck to keep its product moving.
In April 2017, the terminal was holding about 69.4 million barrels of oil — an all-time high in records kept since 2004 on its storage by the U.S. Energy Information Administration.
Recent figures from the agency estimate the terminal held about 23.4 million barrels on Aug. 10, a drop of more than 60 percent.
Analysts stress the inventory drop does not change the fact that Cushing remains a critical piece of the nation’s oil storage and pipelines network.
They add that it shows the terminal continues to be the nation’s logical delivery point for contracts that are bought and sold daily involving West Texas Intermediate crude oil.
The substantial drop in Cushing’s inventory since mid-2017, analysts and an economist say, is part of a normal cycle generated primarily by crude oil prices that have been trending higher since they collapsed at the end of 2014.
Dylan White, an oil markets analyst with Genscape, said traders are enjoying “backwardation,” an industry term describing conditions that enable traders to sell oil they were storing at Cushing and elsewhere for a profit because prices were low.
White said Cushing’s inventories historically have fallen when those conditions exist, including a period in 2013-14 when its inventory fell by a similar percentage.
When market conditions are reversed and in what is called “contango,” inventories at Cushing and other storage facilities have climbed as traders bought oil and stored it on the bet they would be able to sell it for more at a later date.
“If the difference between prices (when it is bought and sold) is significant enough to cover the cost of storage, then it is a pretty easy play for market participants to buy barrels of oil one month and throw it into storage,” White said.
“Low prices incentivize people to store, and Cushing historically has been the primary point for that storage because it is the delivery point for West Texas Intermediate contracts and because its cost of storage historically has been relatively cheap.
“So, that led to those record high storage levels.”
“Once prices have recovered enough to cover that storage cost and generate a profit, then it’s sold.”
While White said Genscape has closely followed Cushing’s inventory levels since 2009, using aircraft and other tools to keep track of storage levels held at the terminal’s various tanks.
While he attributed Cushing’s recent inventory changes to market conditions, he also mentioned that terminal operators’ hard work during recent years has contributed to its growth, both by boosting takeaway capacity from the terminal and by providing additional ways to get domestically produced oil recovered in Oklahoma, North Dakota and elsewhere into its storage.
A Canadian firm announced earlier this year, for example, that it’s adding about 5 million barrels of storage to the operation.
And though White noted some domestic production (particularly from the Permian Basin) is feeding refineries and storage facilities on the Gulf Coast that hold oil for export overseas, he described those activities as peripheral.
“If nothing else, Cushing continues to play a very specific role in the market as far as being a delivery point,” White said. “It is an interesting time to be watching Cushing.”