Cushing Terminals Fill Up Fast, May Lead to New Oil Price Drop

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Researched by Industrial Info Resources (Sugar Land, Texas)--Cushing, Oklahoma, the self-proclaimed "Pipeline Crossroads of the World," is everywhere in the news because of its ninth consecutive week of increased storage levels. With the West Texas Intermediate (WTI) crude-oil price based heavily on the state of affairs in Cushing, the increase in oil stored at the massive terminal complex in the town of 8,000 people has the potential to shift prices.

As of last week, Cushing was storing more than 48 million barrels. Cushing has a total capacity about 85 million barrels and a working capacity of 65 million barrels, meaning that of all the available storage, only about 17 million barrels, less than one-third of capacity, is available. The question is what will happen if Cushing gets full? One possible outcome is another price drop.

While the most recent uptick in storage utilization has been since early October 2014, Cushing's storage has been steadily filling up, with only a few minor declines since July 2014. At its lowest that month, Cushing was storing just less than 18 million barrels. While the current storage levels are not unprecedented--Cushing had stored more than 51 million barrels in January 2013--the rate of increase is newsworthy.

In the ramp-up to 51 million-barrel-utilization in 2013, it took a year to grow to that amount from January 2012, when stocks were at a low of 28 million barrels. Compared to the nine weeks it has taken for oil stocks to grow from 18 million barrels, a figure reminiscent of 2008's levels and hardly seen in that interim, the difference is impressive. The more recent growth rate is more than six times that of when Cushing hit 51 million barrels in 2013--rising 30 million barrels in just nine weeks, as opposed to 23 million barrels 2012-2013.

High-level industry executives have said that Cushing will be full very soon, as early as within the next two months. When that happens, what follows? Without higher oil prices, producers are not given an incentive to sell, and without a significant increase in demand for refined products, refiners have no incentive to increase what they buy.

One hypothesis is that crude-oil prices will drop again when Cushing fills up, though how far is open to speculation. The reasoning behind this idea is that if there is nowhere to store the crude oil produced, then it will be a buyers' market, due to producers having no other place to put the oil. However, as Cushing proves, storage capacity is a finite thing in the world of oil and gas. Even if customers can buy crude oil for $25 per barrel, if there is no additional demand to warrant increased refining, where would they put the surplus oil?

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.