Current inventories at the Cushing, OK, storage hub have fallen more than 27mn bbls since the beginning of November, dropping to the lowest level since January 2015, according to Genscape’s Cushing Crude Oil Storage report. Steady declines have been driven by incoming pipeline outages hampering supply, increased demand along the Gulf Coast, and a backwardation structure in the NYMEX Light Sweet Crude (WTI) futures contracts. As capacity utilization at the hub slides below 45 percent, it is important to assess if the destocking trend is likely to continue and, if so, at what rate.
The Current Path
Storage draws at Cushing have averaged 2.309mn bbls per week between weeks ending November 3 and January 26. The largest weekly declines occurred in January, including a 4.132mn-bbl draw for week ending January 12. Genscape saw that persistent destocking brought storage capacity utilization down 30 percentage points to 44 percent since early November.
Capacity utilization at storage hubs typically does not drop below 20 percent, according to Genscape’s historical data. Based on that, Cushing stocks on January 26 were about 21mn bbls above the operational floor of 17.6mn bbls. If inventories continue to decline at the average rate they have maintained since early November, Cushing stocks would meet the lowest utilization rate on record (27.8 percent) by mid-March, and dip to the 20 percent floor by early April.
These lows may seem surprisingly close, and the recent rate of draws has proven that they are certainly within reach. However, there are several factors that will determine if this “continued decline” scenario actually pans out.
Potential Game-Changers
Variable supply from inbound pipelines
Outages and reduced flows along pipelines that supply Cushing have been major contributors to storage draws at the hub. Specifically, issues along TransCanada’s 590,000 bpd Hardisty, AB,-to-U.S. Keystone pipeline and the 450,000 bpd Wichita Falls, TX,-to-Oklahoma segment of Plains All American’s Basin pipeline have hindered barrels from reaching the WTI delivery point. How quickly these lines are able to return to normal operations will play an important role in the supply and demand tug-of-war at Cushing.
The longer-lasting hit to Cushing’s supply has come from Western Canada. TransCanada’s Keystone pipeline was shut on November 16 due to a leak in South Dakota. The pipeline, which transports barrels from Hardisty, AB, to Steele City, NE, and then onward to either Cushing or Patoka, IL, remained offline through November 27, according to Genscape’s Mid-Continent Pipeline report.
Once Keystone restarted, TransCanada was mandated to operate a segment of the line at reduced rates by a Corrective Action Order (CAO) imposed by the Pipeline and Hazardous Materials Safety Administrations (PHMSA). Capacity utilization on the line has averaged 85 percent since the beginning of December, after operating above nameplate capacity on average between the aftermath of Hurricane Harvey, in mid-September, and the November leak, according to Genscape.
Current market dynamics in Western Canada suggest that Keystone will run at maximum capacity once the CAO on TransCanada is lifted. A bottleneck has formed in recent months as production in Western Canada has surpassed takeaway capacity. The imbalance has led to storage builds in Western Canada and put downward pressure on Western Canadian Select prices, according to Genscape’s Canada Storage report. Shippers are hungry for available pipeline space, and will likely jump at the opportunity to fill Keystone once the line is fully operational. PHMSA has not provided a timeline on lifting the pressure restrictions on Keystone.
Conversely, production out of the Permian Basin region was reduced in early 2018 due to cold weather, reducing pipeline flow into Cushing. Plains’ Basin pipeline was essentially shut on January 8 and did not resume until January 11, Genscape reported. Average weekly flows dropped 154,000 bpd to 141,000 bpd for week ending January 12, the lowest level since monitoring began in 2009. The outage was likely spurred by a combination of maintenance and supply issues caused by production freeze-offs in the Permian Basin, according to market sources.
The shutdown contributed to a 4.131mn-bbl inventory draw at Cushing for week ending January 12, the largest weekly decline since Genscape coverage began in 2009. The pipeline experienced two more temporary shutdowns in the weeks following, leading to continued low flowrates for week ending January 19. The impact on Cushing stocks was substantial, but relatively short-lived. Flows on Basin averaged 306,000 bpd for week ending January 26, the highest level since early December, according to Genscape.
With Basin back online and Keystone inevitably set to resume maximum flows, supply into Cushing is projected to pick back up. Although the timetable and exact flowrates are yet to be seen, it is likely that the resolution of these pipeline issues will slow the stock draws in the U.S. Mid-Continent. Genscape monitors 92 percent of Cushing-connected crude pipelines and alerts customers of any changes in pipeline flows or operations.
Refinery Maintenance Season
Before peak demand season in the summer, spring is a popular time for refiners to perform unit maintenance. The seasonal decrease in crude demand due to planned refinery outages can often impact storage levels. Therefore, year-to-year variation in the magnitude and longevity of the maintenance season can set the stage for domestic inventories early in the year.
Utilization rates in PADD 3 for primary processing units, which represent initial crude runs at refineries, dropped off in January 2017 and bottomed out at 88 percent in early February 2017, the lowest levels since 2014. Utilization rates returned to above 98 percent in April 2017, according to Genscape’s North American Refinery Intelligence Service. In 2016, rates did not return to above 98 percent until June following spring maintenance.
This year, PADD 3 primary processing utilization dropped to 91 percent by week ending January 26, already dipping below the previous four-year average for late January. At least another 972,000 bpd of PADD 3 crude distillation unit capacity is expected to shut through March, which would bring utilization down to 90 percent, according to Genscape.
PADD 2 primary processing utilization remained relatively high as of week ending January 26. However, the maintenance season typically does not hit the Mid-Continent until later in the season. Average utilization rates over the past four years have fallen to 91 percent in early March and gradually recovered over the next two months. Genscape expects at least 650,000 bpd of crude distillation unit capacity to shut through April in PADD 2. From the current rate, that would bring utilization down to 96 percent. However, more turnaround projects are likely to be announced in the coming months.
Based on current and upcoming maintenance, especially in PADD 3, the 2018 spring turnaround season is likely to have at least an average impact on demand compared to previous years. If maintenance is more widespread than the currently announced plans, it could further slow storage declines at Cushing, which feeds refinery markets in PADDs 2 and 3. Important factors to pay attention to in assessing the magnitude of this year’s refinery maintenance will be restart timelines for current outages and occurrences of unplanned upsets, which amplified the impact of the 2017 spring turnaround season.
Subscribers of the North American Refinery Intelligence Report are alerted about planned and unplanned refinery unit outages and will soon have access to the 2018 Refinery Turnaround Schedule supplement published by Genscape. The monthly Turnaround Schedule provides a forward-looking glimpse at planned maintenance activities at refineries in 2018.
Export opportunities and global economics
High crude demand along the U.S. Gulf Coast from an abundance of export opportunities has contributed to the Cushing draws in late 2017 and early 2018. However, the recent destocking trend in Cushing has provided support for the NYMEX crude contract, narrowing its spread with international benchmark ICE Brent and giving pause to market participants when considering foreign demand.
Crude exports in 2018 have averaged 1.168mn bpd through January 26, even after posting 12.235mn bbls in week ending January 26, which lifted the average from 955,000 bpd, Genscape North American Waterborne data shows. As of January 26, January’s export average is down from 1.436mn bpd in December 2017, and the 1.39mn bpd average post-Hurricane Harvey, September through December.
In addition to the narrower WTI/Brent spread, other likely contributors to high export volumes at the end of the year were U.S. Gulf Coast ad valorem taxes and North Sea supply constraints due to the Forties Pipeline System outage. Many market participants in Texas look to move barrels out of the state at the end of the year in order to mitigate expenses incurred from ad valorem taxes, which are based on the amount of crude being stored and are higher than many other states. During the final two weeks of December, Genscape saw crude exports average 11.305mn bbls, up nearly 2.5mn bbls from the average of the two prior weeks. The first week of 2018 had a week-on-week decline in exports at nearly 3mn bbls.
INEOS’ 1.15mn bpd Forties Pipeline System (FPS) was shuttered for more than two weeks before coming back online December 25 while it underwent repairs, shutting-in about 400,000 bpd of North Sea crude production, according to Genscape’s Forties Supply Chain Monitor. The FPS moves crude and liquids from more than 80 fields, including the prolific Buzzard Field. Forties crude typically exports to markets outside of Europe, namely serving as feedstock for Asian refiners.
The narrower WTI/Brent spread recently has caused some domestic producers to re-evaluate export opportunities. The spread between front-month WTI and ICE Brent has gradually narrowed since peaking at $7.05/bbl on December 26. WTI closed at a $3.90/bbl discount to Brent on January 29, the narrowest differential since mid-August.
“We look at exports each month, and we are not sure if we can make it work for March,” a Mid-Continent producer said.
For players along the U.S. Gulf Coast, differentials have priced with the narrower WTI/Brent spread, accommodating waterborne interest to allow for exports to continue. The Genscape assessment for Light Louisiana Sweet, the benchmark U.S. Gulf Coast light sweet crude, was assessed at WTI plus $2.35/bbl on January 29, down $1.85/bbl from the week before and $2.65/bbl on January 2.
The value for WTI in Houston at Magellan’s East Houston terminal, the crude many international market participants use when considering the economics of exporting crude from the U.S., has also come off in recent weeks. On January 29, WTI at MEH was heard at WTI plus $1.75/bbl, a decrease from WTI plus $3.80/bbl heard on January 18.
Crude stocks along the Texas Gulf Coast have also decreased in recent months, down nearly 20mn bbls between weeks ending September 22, 2017, and January 26, according to Genscape’s Gulf Coast Crude Storage report. Global economics and subsequent export opportunities from the U.S. Gulf Coast will be an ongoing determinant in U.S. inventories, as foreign demand has provided a major outlet for domestic barrels in recent months.
Futures Contract Structure
Another contributing factor to the Cushing storage draws has been a shift in the NYMEX Light Sweet Crude (WTI) contract spreads. The six-month WTI contract spread has consistently been in a backwardation structure since mid-November after predominantly being in a contango structure since November 2014, widening to $2.86/bbl on January 25.
The front-to-second month spread has also consistently been in a backwardation structure since early January. The WTI forward curve has promoted destocking at Cushing since the beginning of the year. The direction and strength of the WTI futures contract structure, which are largely reflective of the market’s perception of all other factors, will of course play a central role in storage levels at Cushing.
Conclusion
The causes of the storage draws at Cushing over the past three months have certainly been multifaceted; hindered pipeline supply, high demand for exports, and a newly backwardated pricing structure have all played a part. On top of that, operations began on Plains’ 200,000 bpd Diamond pipeline from Cushing to Valero’s 195,000 bpd Memphis, TN, refinery in early December, providing another outlet for barrels at the hub.
Similarly, there will be several factors that will determine if the stock draws persist, and at what rate if so. At the current pace of decline, Cushing inventories would reach an operational floor within three months. As the oil industry navigates the shifting market dynamics already seen in the first month of the year, it will be increasingly important to monitor storage levels, pipeline operations, refinery utilization, and waterborne movements to understand the factors that surround inventory draw in Cushing and the broader United States. Genscape will continue to report timely, accurate data to provide transparency on each link in the crude supply chain.
Genscape's Cushing Crude Oil Storage data is collected using infrared cameras, aerial diagnostics, and other proprietary measurement techniques. This approach translates into highly accurate, advance notice of the actual oil storage levels at Cushing. To learn more or request a free trial of Genscape's Cushing Crude Oil Storage Report, please click here.
Genscape’s Mid-Continent Pipeline Service provides visibility into what’s driving the U.S. crude oil markets, including insight into critical pipelines supplying and servicing key storage hubs, production basins, and refineries. The report includes alerts about major pipeline shutdowns, start-ups, and flow changes. To learn more, or to request a free trial of Genscape’s Mid-Continent Pipeline Service, please click here.
Genscape's North American Refinery Intelligence Service combines observations obtained from infrared cameras with in-house analytical and technological expertise to provide an unrivaled view into near-real-time operations at U.S. and Canadian refineries. The service provides subscribers with insight into supply and demand with information on intra-day changes in the status of product-specific units at refineries. To learn more about Genscape's North American Refinery Intelligence Service, or to request a free trial, please click here.