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Cushing crude stocks dip but tank owners say expansion possible

By Alison Ciaccio in New York

April 14, 2014 - The ramp-up of US Midcontinent crude oil pipelines since the start of the year has led to more oil than ever moving from Cushing, Oklahoma, to the US Gulf Coast, and even with inventories at the delivery hub near a five-year low, tanks owners say under-utilization is not an issue.

Cushing, which is the primary crude oil storage location in the US, has seen a decline in crude oil stocks of more than 14.5 million barrels, or 35%, over the past 10 weeks.

US Energy Information Administration data showed that Cushing crude stocks were at 27.3 million barrels for the reporting week ended March 28 -- a nearly 30% deficit to the five-year average.

Related podcast: Changes in shale flows could mean changes to US crude storage hubs The increase in crude oil moving out of Cushing and heading to the US Gulf Coast, since January, is due in part to the startup of TransCanada's 590,000 b/d Cushing Marketlink pipeline -- which begins at Cushing and extends south to Nederland, Texas.

The 400,000 b/d Seaway crude pipeline also runs from the Midcontinent to the Gulf Coast. In late May or June, the Seaway line is set for an expansion that will more than double its capacity to 850,000 b/d.

In a recent report from the EIA, economist Hannah Breul noted that Marketlink, as well as Seaway, are the most recent in a series of infrastructure developments that have either increased Cushing crude takeaway capacity or made it possible to bypass Cushing and move crude directly to refining centers.

In 2013, average crude movements from the Midwest to the Gulf Coast rose to 470,000 b/d, 68% higher compared with 2012.

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With these expansions, the current situation at Cushing is very different from that during the 2010-2012 period, Breul noted, when additions of roughly 815,000 b/d of pipeline capacity into Cushing far exceeded additions of 150,000 b/d in capacity out of Cushing.

Tanks owners not concerned about lower stocks

Still, some companies that own tank storage at Cushing say they are not concerned about pipelines bypassing Cushing, which some suggest could make the need for capacity at Cushing less attractive.

"We believe Cushing storage will be needed long term since it provides traders flexibility to deliver crude oil to the highest margin market at a given time and there is a continued need for strategically-placed blending services due to the growing variety of crude oil grades and specifications," a spokesman from Magellan Midstream Partners said.

Magellan, whose tanks are 100% contracted, ranks as the third-largest capacity owner at Cushing at 12 million barrels. The company, according to the spokesman, has not announced plans for further storage capacity expansion at this time but has not ruled it out.

"We are currently enhancing connectivity between our tankage for improved flexibility. In addition, we are adding truck unloading capabilities to provide additional options for our customers," the spokesman said.

Enbridge, which also leases 100% of its tanks, ranks second by size of capacity at Cushing, according to data from Genscape, with about 18.7 million barrels of capacity.

Mike Moeller, director and general manager of Midcontinent assets at Enbridge, said that the Cushing complex, with various pipelines that run in and out of the complex and about 70-80 million barrels of total storage, give their customers many options to expand.

Related chart:
Cushing oil storage capacity by status
"The optionality of [Cushing] lets our customers able to bring it in, store it, blend it... we have a full slate of options for our customers. We look to always work with customers for those that want additional storage," Moeller said. "But when it boils down to Enbridge, we are as busy as ever."

When asked if Enbridge has plans for additional storage soon, Moeller said none has been publicly announced, but they are "constantly working with customers... to search out new projects."

Over the last four months, Moeller said Enbridge has brought on another 1 million barrels of storage for a customer.

"With our terminals being fully subscribed, we don't see Enbridge as overbuild yet," Moeller said.

Will Robinson, an analyst of storage products at Genscape, said his company tracks around 76 million barrels in operational capacity at Cushing and are seeing about 5 million barrels currently under construction.

"The TransCanada terminal is nearly complete and Deeprock is in the middle of a major expansion. PAA and SemCrude are only adding a few tanks to existing terminals," Robinson said.

He added that a few owners have permits for capacity they have yet to build.

Related chart:
Cushing oil storage capacity by status
"Plains has the largest amount, with around 16 million barrels permitted and only 6 million of it built so far. The terminal owners at Cushing can ramp up projects pretty quickly depending on market conditions, so it's hard to say if we will see a drop off in construction over the next few years," Robinson said.

Crude oil in backwardation, Brent-WTI narrows

The NYMEX front/second month crude spread has been in steady backwardation since January 21, moving as far as $1.20/b on March 19.

Enbridge's Moeller said that the backwardated crude oil market "doesn't provide for our customers to sit on crude."

"But we cannot predict the future. The day we move back into contango, we may see the Cushing complex fill up again," Moeller said.

Philip Verleger, a US-based oil economist, said in a recent report that the construction of new storage facilities at Cushing, combined with the opening of additional shipping capacity has created a "strange surplus."

"There are now too many tanks," Verleger said in the report.

Working storage at Cushing, which is seen as that which is usable, was at 65.739 million barrels as of September 2013. That is up from 46 million barrels in September 2010, EIA data showed.

Verleger said that over the last few years, the nature of the storage business at Cushing has changed. He said that 42% of the capacity was used exclusively by owners in 2010, but that has fallen to 15% in 2013.

He added: "The WTI market will likely remain in backwardation for the foreseeable futures. A significant amount of storage capacity in Cushing must be scrapped or converted to other uses before we can expect to see contango."

Over the last 10 weeks as Cushing stocks have significantly dipped, the front-month Brent-WTI spread has narrowed by $6.10/b, or 55%, to $5.06/barrel as of Friday.

In the EIA report on Cushing, Breul noted that sustained high crude runs at refineries in the Midwest and Gulf Coast, and expanded pipeline infrastructure and railroad shipments that have made it possible for crude oil to bypass Cushing storage and move directly to refining centers on the East and West Coasts were also reasons for the recent draws in Cushing stocks.

Midwest refinery utilization averaged 91.3% of capacity in 2014 through March 28, up from 88.1% over the same period in 2013. Refinery utilization in the Gulf Coast was also higher, averaging 88.2% of capacity in 2014, up from 85% of capacity during the same period in 2013.

Recently, crude stocks in the Gulf Coast reached their highest level on record at 200.32 million barrels for the reporting week ended March 21, EIA data showed.

But Breul warned that despite market conjecture that the Gulf Coast may be reaching its threshold for crude storage, refiners have more space available. EIA data as of September 2013 shows that refiners in the Gulf Coast have 72.85 million barrels of working storage capacity. As of January, refiners in the Gulf Coast were holding 41.5 million barrels of crude oil.

"There is a little more slack in the system than recognized," Breul said. "People have been overlooking capacity at refiners as well as line fill."

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