The Crude Glut’s Silver Lining
About this time last year, there were a number of stories warning about the status of crude oil inventories in the U.S. I wrote several articles addressing this, but the overriding message was that there was more spare crude storage capacity than advertised, and that the situation would soon improve.
Inventories did in fact decline from a peak in April through July as refineries increased throughput for the summer driving season. Crude oil prices spiked from the lower $40s in early March to reach $60/bbl by early May.
But then shale oil production proved to be more resilient than most expected, and in late summer inventories once more began to rise. In October they eclipsed the levels set in April and continued to rise from there. The only saving grace was that new storage capacity continued to increase as well.
The inventory situation today, however, looks worse than it did a year ago. It’s not only a U.S. phenomenon, as the International Energy Agency (IEA) recently noted:
“Global inventories rose by a notional 1 billion barrels in 2014-15 with the fundamentals suggesting a further build of 285 mb over the course of 2016. Despite significant capacity expansions over 2016, this stock build will put storage infrastructure under pressure and could see floating storage become profitable.”
But it isn’t only floating storage that looks profitable at the moment. Inventories are very high at Cushing, Oklahoma, which is the country’s most important storage hub as well as the designated point of delivery for the commodity’s New York Mercantile Exchange’s futures contracts. The tight capacity means that business is good for companies that own storage infrastructure assets in Cushing.
In April 2015, Cushing stocks reached an all-time record level of 62.2 million barrels, but they then declined through September to 53.4 million barrels. Since then they have again been on the rise, hitting 64.7 million barrels last month. Part of the reason is that the market has been in contango, a condition in which the more distant futures contracts are priced above those expiring soonest. Contango makes it profitable for producers to store crude oil for later delivery.
Which companies have a major storage presence in Cushing?
According to a list recently compiled by the Tulsa World, the eight largest storage providers in Cushing are:
- Enbridge Energy Partners (NYSE: EEP) – 20 million barrels (mb) of storage
- Plains GP Holdings (NYSE: PAGP) – 20 mb
- Magellan Midstream Partners (NYSE: MMP) – 12 mb
- Rose Rock Midstream (NYSE: RRMS) – 7.6 mb
- Blueknight Energy Partners (NASDAQ: BKEP) – 6.6 mb
- NGL Energy Partners (NYSE: NGL) – 4.1 mb
- CVR Refining (NYSE: CVRR) – 3.8 mb
- Enterprise Products Partners (NYSE: EPD) – 3.3 mb
Others, including TransCanada (NYSE: TRP) and Sunoco Logistics (NYSE: SXL), account for another 3 mb of storage capacity in the aggregate.
As was the case last year, we will likely see a peak in inventories over the next month or so ahead of summer driving season. But until we begin to see some substantial declines in U.S. shale oil production, inventories in Cushing are likely to remain high — to the benefit of the above-listed companies.