Crude storage at Cushing, Oklahoma, will be full by early May if inventory additions hold to the brisk pace they have set over the past 12 weeks.
Inventories have gained for 12 consecutive weeks at an average pace of 2mn bl per week. Inventories climbed during the week ending 20 February by 2.4mn bl to 48.7mn bl, the highest level since June 2013. Stock levels have doubled since the end of October, growing at a pace unmatched in more than 10 years of records kept by the Energy Information Administration (EIA).
If the stock build continues at the same rate, Cushing storage will fill by early May. Working storage capacity at the key US delivery hub totals 70.8mn bl, according to EIA estimates.
Industry executives expect stocks to build further as a steep contango encourages traders to store crude.
"Cushing is filling up at a pretty high rate and in two months, it will be full," Plains All American Pipeline president Harry Pefanis told analysts in early February. Plains is a large Cushing storage holder.
Edward Morse, global head of commodities at Citi Group, said 26 February that Cushing storage could reach capacity in seven weeks. Cushing storage operator SemGroup 27 February estimated that Cushing would fill by April or May.
Independent refiner HollyFrontier 25 February estimated Cushing would reach capacity in eight to ten weeks. Upcoming maintenance in the Cushing market could cause it to fill faster, HollyFrontier chief executive Mike Jennings said.
"I believe that Cushing is going to fill or close to fill to the operating level, and that will carry over through a decent portion of the year in terms of impacting inland versus coastal crude differentials," Jennings said.
Gulf coast light crude differentials don't support shipments from Cushing.
WTI at Houston, Texas, stood at $53.89/bl on an outright basis on 27 February, placing the grade at a premium of $1.76/bl to WTI at Cushing delivered to the Enterprise Crude Houston (Echo) terminal via the Seaway pipeline. But a market participant with Cushing tankage leased for 40¢/bl at Cushing stood to make $1.98/bl by storing crude at the trading hub based on April and May Nymex settlements that day.
Heavy differentials do not encourage shipments to the Gulf coast either.
Canadian heavy sour Cold Lake at Echo sold on 25 February at a discount of $7.05/bl to April CMA Nymex WTI, while Cold Lake at Cushing sold at a discount of $7.65/bl. The cheapest tariff for heavy crude on the Seaway pipeline costs $2.99/bl.
Shippers with take-or-pay commitments on TransCanada's Marketlink pipeline and Enterprise's Seaway pipeline have offered line space for less than published rate, signaling that the lines remain underutilized.
Between 416,516 b/d and 573,411 b/d of Padd 3 crude distillation capacity will remain offline because of maintenance from January through March, according to the EIA. Capacity offline will fall to 26,500 b/d in April before increasing to 321,129 b/d in May.
Higher storage costs on the Gulf coast have further discouraged southbound shipments. Before the contango deepened, Cushing storage was available for lease at around 40¢/bl, according to NGL Energy. By comparison, storage on the Gulf coast costs around 55¢-75¢/bl. Trading sources say spot storage at Cushing is now very difficult to secure at rates that allow traders to profitably store crude.
As Cushing stocks build, industry executives have predicted that the Brent-WTI spread will widen this year.
Phillips 66 Chief Executive Greg Garland sees differentials at $6-10/bl, while HollyFrontier's Jennings expects the WTI/Brent spread to widen to the low double digits. The spread settled at $9.95/bl today after trading as wide as $12.82/bl last week.
Marathon Petroleum chief executive Gary Heminger also predicts that rising Cushing stocks will cause the differentials to widen.
"We believe as those inventory levels continue to rise, it will have a favorable impact on crude differentials in the coming months," Heminger said.
But the contango should narrow in the second half of the year, Marathon Petroleum senior vice president Michael Palmer said.
"That's the $64,000 question in my mind and everyone's mind is how long does this very weak market last," Palmer said. "As things come back more in the balance in the second half of the year, then I would guess that the contango would narrow."
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