(Robert Campbell is a Reuters market analyst. The views expressed are his own)
By Robert Campbell
NEW YORK, March 19 Inventories of crude oil at Cushing, Oklahoma, the delivery point for West Texas Intermediate crude oil futures, are almost certain to set a new record high within weeks before trending lower in the summer.
But the key question is how fast will stocks fall. In spite of fears last summer that stocks might continue to mount at Cushing, the North American oil market engineered a big draw down in supplies.
A repeat of this trick looks harder this year. Even with the Seaway pipeline due to start around June 1, Cushing is likely to have a big stock overhang through the summer.
This situation may well come even as the rest of the oil market scrambles to build stocks amid mounting geopolitical fears.
Indeed Cushing illustrates all too well the fact that proximity to demand is as important as the size of stockpiles when if they are to have much influence over global oil prices. [ID:nL2E8EE1XH]
RUNNING TO STAND STILL?
To get an idea of how things might play out at Cushing this summer, a look back at 2011 is warranted.
Last year Cushing stocks rose from 34.5 million barrels at the end of 2010 to peak just shy of 42 million barrels by mid-April, growing at an average pace of 267,000 barrels a week over 14 weeks.
(See graphic: r.reuters.com/wuj66s)
Stocks then fell from through the end of the year at an average pace of 332,000 barrels a week.
The decline was more pronounced in the mid-April to end-of-August period, when Cushing stocks fell on average by 441,000 barrels a week.
Now things look more challenging. Over the first nine weeks of 2012 weekly Cushing stocks have risen on average by 1.479 million barrels.
This huge build has come despite Midwestern (PADD 2) refineries processing more oil this year.
From January to mid-April 2011, PADD 2 refineries processed an average of 3.271 million barrels per day of crude. So far in 2012 runs have averaged 3.466 million bpd.
A direct comparison with the first nine weeks of 2011 is a bit more favorable, but even so runs are nearly 150,000 bpd (or 1 million barrels a week) higher in 2012 than in 2011.
In other words, Cushing stocks have risen at a pace five times faster than last year even as regional refineries have processes significantly more crude oil.
Considering that last summer's drawdown at Cushing came as PADD 2 refinery runs averaged just over 3.5 million bpd for much of the second half of the year refineries alone will not be enough to replicate last year's performance.
Indeed, it even suggests that in the absence of the Seaway pipeline Cushing stocks may well have continued to build this year. And if that is the case, the initial impact of the Seaway reversal on Cushing stocks may be limited.
Seaway will take approximately 1 million barrels a week out of Cushing from June 1. But stocks are so far rising faster than that.
NOT SO FAST
Yet the situation at Cushing might not be as dire as the foregoing analysis suggests. For instance Cushing stocks are rising rapidly as a percentage of overall PADD 2 crude oil inventories while overall stock levels lag 2011.
(See graphic: r.reuters.com/bur27s)
In fact, a closer look at the behavior of PADD 2 stocks shows a strange dynamic. Huge builds at Cushing are outweighing large declines elsewhere in the region.
(See graphic: r.reuters.com/wer27s)
Or, to look at this from another perspective, the amount of free storage capacity elsewhere in PADD 2 is rising rapidly.
On the assumption that the terminals outside of Cushing can hold at least as much oil as they did last April when non-Cushing PADD 2 stocks hit a record, at least 5 million barrels of tankage is free outside of Cushing.
(See graphic: r.reuters.com/zer27s)
In other words, crude is being pushed out of storage in other parts of PADD 2 and ending up in Cushing. This is likely due in part due to the quirks of pipeline rules that have encouraged physical oil traders to move more crude into Cushing than they might have "normally" done. [ID:nL2E8CVASB]
So it's not the case that Cushing is a "last resort" place to store oil yet. Traders are not filling up Cushing because there are no other places in PADD 2 to store crude.
More space is opening up elsewhere for crude to be stored, if necessary. If Cushing prices get sufficiently depressed, regional traders will almost certainly opt to store oil away from the hub if possible.
Regional refinery runs should also tick higher as maintenance wraps up, particularly at refineries connected directly to Cushing, like CVR Energy's Coffeyville, Kansas plant.
And with a number of new rail terminals in North Dakota set to start service in the second quarter, the supply side of the equation may not be as bad as it is right now in a few more weeks.
Even so, it seems likely that any drawdown at Cushing this summer will be much smaller and slower than the 2011 drawdown even with Seaway, especially if any unplanned refinery problems crimp regional demand.
A major change at Cushing is unlikely until the Seaway expansion, which will add some 250,000 bpd of southbound capacity, is completed in late 2012 or early 2013.
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