Rapidly drawing crude inventories at Cushing have been the subject of intense focus in the market in recent weeks, with seemingly nothing on the horizon that could slow the pace of declines at the all-important pricing point for Nymex WTI futures.
That has helped lead to, unsurprisingly, another rapid strengthening in time-spreads with M1-M2 topping $2 per barrel last week. As strong a signal as that is, the equivalent market structure in ICE Brent futures is even more incredible. That disconnect in part reflects the fundamental, physical constraints that are currently at play in Cushing compared to the broader seaborne market, as well as the speculative and geopolitical factors that are being expressed more effectively in Brent.
With inventories already low in Cushing and limits on the pipeline capacity that can draw crude out of the hub, further backwardation will not necessarily speed up the pace of declines there, though it does mean that poor storage incentives will continue to keep inventory low. It may also mean that - where possible - oil is being moved straight to the Gulf Coast to reach international markets rather than being moved to the Cushing storage hub. For the time being it does not look like such dynamics will change, though we can well imagine a situation where, once inventory comes within sight of the lower limits of workable commercial inventory, relative pricing between the hub and neighbouring crude pricing points (Midland, Houston etc.) is simply forced to adjust to stop further outflows.
Where exactly that level is will be hard to determine, but the 20 million bbl mark is evidently an important marker point having only been breached a handful of times since 2008 when inventory levels were generally much lower. One useful indicator now available in the GSI TankWatch data is the tank-by-tank utilisation figure. This is delivered for all 434 operational tanks in Cushing and provides a clear inventory level above the tank bottoms. Understanding this minimum operating inventory level for every tank certainly enables an early indicator to these lower limits being reached. On Monday this week the data showed over 1/3rd of all tanks at Cushing are within 10% of the lowest level. 2/3rds of the tanks are within 15% of bottoming out. Monitoring this situation tank-by-tank as the draw-downs continue could be an important factor.
The situation in Ukraine will also play a huge role – if Russian oil does turn out to be the target of strict sanctions or prolonged “self-sanctioning”, it will for some time mean an effective massive tightening in the spot crude market. In that case strong price incentives would emerge to bring more US crude to international markets. Large and coordinated SPR releases, particularly from US storage may well come into that equation.
By Neil Crosby, OilX and Dan Schnurr, GSI
Neil Crosby has a decade of experience in oil and gas consulting and currently works a senior analyst at OilX. His work has focussed heavily on market analysis and price forecasting, in particularly on the downstream oil sector.
Dan Schnurr studied at Bloxham before attending the Universities of Bristol and Nottingham. After first working with Aramco in the middle east, he has spent over 30years measuring, analysing and writing on oil storage.