By: Qvintin Koister
Global crude oil prices rallied some 27% through the third quarter of 2023. This ascension was accompanied by a structural decline in global crude inventories which also prompted near dated delivery prices to move significantly over future dated prices. This is a classic sign of a tightly supplied commodity market but headline-grabbing rhetoric pointing to the steep decline in Cushing inventories as a sign of a crude oil shortage may be a bit overblown.
Famously dubbed the “pipeline crossings of the world,” Cushing Oklahoma serves as one of the larger storage facilities in The United States. With capacity of 78 million barrels, Cushing is able to pull crude from key North American basins while supplying refineries from the Midwest United States to the Gulf of Mexico. Perhaps it is best known due to it being the delivery point for the NYMEX Crude Oil futures contract. Nevertheless, its significance as an inventory indicator has been dwindling over the past several years.
Most recent figures from week ending September 22 show that Cushing inventories halved during the third quarter to 21.958 million barrels. This figure is rapidly approaching the point of theoretical “tank bottoms", a level where sediment, dirt, and oil emulsified with water accumulate in the bottom of storage tanks and requiring extra chemical processing to recover additional hydrocarbons. This has brought out all the hyperbole of a national crude shortage, but reality shows a much different picture due to a structural shift in the United States oil and refining markets about 8 years ago.
The United States Congress passed the Energy Policy and Conservation Act in 1975 which effectively put a ban on US Crude Oil exports. Some waivers were granted over the years, but it aided in keeping the United States as a net importer. The shale boom eventually led to that ban being lifted in 2015 as the U.S. turned into a top producer, and net exporter of crude oil.
As US exports continued, Platts decided to include the US grade, WTI Midland as deliverable to the global crude oil benchmark, Brent (Note: WTI Midland is not to be confused with NYMEX’s WTI Futures Contract). This implementation opened up further export opportunities for United States crude oil and has further dented the significance of Cushing inventories as they have simply moved elsewhere for more flexibility, such as the Gulf Coast.
While the headline-grabbing Cushing figures may continue to spark volatility in the paper oil markets, their significance as a data point is not what it once was. With that said, the structural decline in global crude oil inventories continues to march on in the face of macro headwinds making contrarian plays against the Cushing figures a potential fools bet.
1. Slumberger Energy Glossary Terms. tank bottoms | Energy Glossary (slb.com)
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