Cushing 50 Million, Boom & Bust Cycles, US Debt & Recession

EconMatters's picture


By EconMatters


Cushing Magic 50 Club

The final EIA Inventory report for 2012 is coming out on Friday, and according to the API report, Cushing inventories increased another 2.23 million barrels to a record 49.2 million. All this build in Cushing happened even as the Seaway pipeline began pumping crude from Cushing, Oklahoma to a major U.S. refining hub in Houston, Texas in May of 2012.




The problem here is that U.S. and Canadian oil production is increasing faster and producing more oil than Cushing can build extra storage or increase pipeline capacity, and or bring new pipeline projects online from Cushing to Houston.  Oil stored at Cushing basically jumped from 30 million barrels to 50 million barrels in 2012, an increase of 20 million barrels which is just an incredible feat, just imagine if there were no pipelines pumping oil to Houston in 2012. In fact, full capacity including shell capacity would have been completely filled to the gills, and Cushing would have to stop accepting oil into its facilities.


Goldman Sachs Forecasting Prowess

Goldman Sachs forecast that the spread between Brent and WTI would reduce to $4 at the beginning of 2013, they forecast this early in 2012, and have since backtracked from this forecast, but even their backtracking seems way off at this pace.



But you cannot take anything Goldman Sachs says about oil forecasting with any seriousness, given their past record on price predictions, remember the $200 oil price forecast, what Day Dreamers… the global economy would collapse long before it got to $200 as the entire global supply chain from China Manufacturing, to Country specific subsidies for its citizens rely on a certain price input to make their numbers work. Blow out that input cost by even 30%, and the proverbial recession starts hitting the fan, and something the Saudi`s have known for a while, you won`t be able to give oil away at $35 a barrel!

We have had paper recessions thanks to the actions of the Central Banks for the most part, but a true organic recession started by out of control input costs cannot be alleviated by any central bank planning, and that is what Goldman Sachs failed to realize. Once Oil gets too high, it effectively slits its own throat!


Holiday Pump Job & Speculators

The speculators are pushing oil up again over the past two weeks during thinly traded holiday market on low volume with the diehards trying to make their yearly numbers look better, but the fundamentals for WTI and Brent don`t bode well for 2013 with the North American production output putting downward pressure on WTI prices, and the expected increase in Oil production from Iraq, Kazakhstan, Sudan and others putting downward pressure on Brent prices.


Speculators have all but left the Gold and Silver markets towards the end of 2012, are the oil markets the next frontier where the easy bullish speculation dries up? Right now everyone and their uncle is in the weak Yen trade, but that speculation has already come along way, it is very crowded, and it wouldn`t be the first time that Japan fails to weaken their currency. How many times has this trade failed over the past 3 years?


US Austerity Only a Matter of Time

With the global economy basically being artificially supported by central bank policies, the real issue is of a global debt problem that is not getting any better, only worse, and is unsustainable. The global economy appears headed for another decade of deleveraging in a massive deflationary loop cycle that has only just begun for the most powerful consumer of Oil products in the world, namely the U.S. economy, as the United States has yet to take their austerity medicine, and that is the real elephant in the room.



When this finally happens expect WTI and Brent to be priced in the $45 a barrel range. As when the U.S. gets a cold, the entire global supply chain gets the flu! And with a 16 trillion dollar debt issue and climbing, that`s going to be one major austerity project, then the real deflationary loop kicks in.


The government cuts back spending, the economy goes into recession, china manufacturing recedes, oil and commodities contract, those resource laden economies go into recession, and the whole loop feeds back into itself, and you have a global recession of epic proportions. It`s just a question of when the United States can no longer kick the can down the road before the entire world is held hostage just like Europe over the U.S. version of an austerity mandated project. 


Supply versus Demand

So in the short term they can build more storage facilities and more pipelines out of Cushing, but the North American production increases are always going to be more than the measures applied to alleviate this glut because the fundamentals of high oil prices in a 2% at best economic growth engine that is borrowing the future through artificial means of stimulation at the present just reinforces that the real issue is one of demand versus supply. At current prices there is going to continue to be more production coming online versus the demand to eat up that supply. Simple economic theory, and the solution is probably two-fold: a reduction in prices to increase demand, and ultimately, a cutback in production around the world.



Bear Cycle in Oil

There will be a major pullback in oil prices, we are presently already in the deflationary stage, but you haven`t seen anything yet, because we are increasing production (we currently produce more than we consume each day)  around the world as prices are real high relative to demand. What happens when the central bank stimulus stops being effective, and it stops altogether, and the debt issues are finally addressed? That is when the real recession takes hold, and the only solution then to massive oversupply is stopping production. The real question is who stops production: is it North America, Russia or OPEC? The real answer in the boom and bust cycles that play out in oil industry is all of the above, in the end everyone is going to have to cut back production as prices are going to drop like a rock in the next bear cycle in the oil industry.


OPEC Losing Relevance & Power

You see the diamond industry has an effective cartel to keep supply off the market, but since we do not have a global cartel, and because of the boom price in crude oil over the last decade, we now have a global production market once again in oil with all kinds of new participants all over the world who are not members of OPEC, so with robust growth in global production around the world, and no global cartel, you get an oversaturation of the market, and that is what we are starting to experience right now, and its effects will really start to show up in 2013 and 2014.


2015 Outlook

Then in 2015 companies are going to start losing money in their production projects, and some tough decisions are going to have to be made. And this all assumes a decent global economy, I figure the U.S. will be able to kick the majority of the can down the road for the next 2 to 3 years, but after that the austerity project in the U.S. will become front and center. And you think politics are nasty now, just wait till 2015/2016 that`s when the fun really starts.


 In fact we may have to create an entirely new independent political party to clean up the budget deficit and spending mess that Washington has morphed into today. But make no mistake it will be cleaned up one way or another, either through austerity or outright default!


So enjoy your job in North Dakota while you can, be sure to put extra income into savings, because my guess is that in four years, after oil pulls back, those projects are no longer sustainable, and the world goes back to the default supplier of OPEC until the next Boom investing cycle starts all over again.


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epwpixieq-1's picture

A very revealing article:

Especially read after this "What happens when the shale boom... goes boom?"

An interesting coincidence about projecting a focal 2015 year.

Looking forward for the fun part, will be epic time.

Plan wisely!

gasandoil's picture

They grow crude oil tanks and pipelines like weeds in Cushing. I started an assignment with a major storage and transport company in 2008. Shell capacity for all tanks in crude service there grew from 33 to 66 million barrels in 3 short years. The shippers have been eagerly parking volume there in 2012 simply because of the massive pipeline capacity starting up to gulf coast markets in 2013. How many days to move 20 million bbl south at 400,000 bpd? The 20 million bbl is what the author calls " an incredible feat" for 2012. The real feat has been the rapid and safe construction of so many new tanks and pipelines. Cheers to all the welders and crews out in the cold 7 days a week to keep our energy supplies domestic and reliable!

Money Squid's picture

I wonder if all this spare crude can be used to compliment the US Strategic Reserve in case of a war with an OPEC member....cough cough.

Tommy Gunner's picture

Shale - and Tar Sands - need oil at minimum $80 a barrel.

Shale has been known about for years - but nobody resorted to this extraction method because it is expensive and an environmental nightmare.

Why do you think other parts of the world are - so far- refusing to inject toxic chemicals into the ground to get at shale oil/gas?


The fact that we are now resorting to such expensive and polluting extraction techniques iindicates we are scraping the bottom of the barrel

gasandoil's picture

A few numbers and links should help put the "problem" at Cushing in perspective...
Seaway pipeline was reversed and started moving around 100,000 bbl per day southward out of Cushing in June 2012.
Next phase of Seaway expansion will allow 400,000 BPD to move out of Cushing starting in January 2013. Additional capacity will come on line in 2013 to the tune of 700,000 BPD when southern leg of Keystone project is in service. That is over 1 million BPD of new capacity out of Cushing that will gradually close the spread between WTI and Brent back to single digits in 2013. Another important detail to consider is that right now very little of the Bakken production makes it to Cushing because of so many railway destinations soaking up the light sweet product at higher prices than WTI at Cushing. My calculations show the potential challenge/opportunity to be at Texas gulf coast marine terminals going forward. Check out OILT and GEL if looking for investment ideas. EPD and EEP are worth a look as well.

Market Analyst's picture

what am I missing? " Additional capacity will come on line in 2013 to the tune of 700,000 BPD when southern leg of Keystone project is in service."


The new pipeline, which is designed to parallel the existing right-of-way from Cushing to the Gulf Coast, is expected to more than double Seaway's capacity to 850,000 BPD by mid-2014.



gasandoil's picture

Seaway project has phased start-up capacity as follows: 150,000 bpd in June 2012, 400,000 bpd in January 2013, and 850,000 bpd in 2014. The Keystone ( gulf coast project ) will carry 700,000 bpd by late 2013.

Seaway is a joint venture of Enterprise and Enbridge. The gulf coast project is owned by Transcanada. Total new capacity from Cushing to gulf coast will be 1.55 million bbl per day in 2014 with part of that capacity operating in 2013.

Peter Pan's picture

Deflation is only relevant when the present fiat regime is still in place. If it collapses the only thing that will matter is the relative value of one good or service against another good or service until another paper or metal system comes into being.

LawsofPhysics's picture

Bingo.  When fraud is the status quo, possession becomes the law.  Hell, moonshine will be a median of exchange simply because it can be used as a fuel or a painkiller.

Augustus's picture

There is enough rail capacity now in the Bakken to move the production.  It is being shifted away from Cushing.  that is filling the supply needs away from the Gulf coast and leads to the Cushing buildup.

IslandMan's picture

"Robust growth in global production"   Hahahaha

Since 2005, crude and condensate production has increased by just 0.3% per year.  If that's "robust", I'd like to see what you'd call "weak".

KansasCrude's picture

No doubt the production increases in the U.S. and Canadian Bakken plus the increase in overall horizonal has pumped up production. However reading the Investor decks of the Canadians I hear NO MAS. They are losing their asses and are releasing rigs by the massive amounts. Production will show major declines within 12 months. Getting hosed by the big discounts to the WTI and the U.S. refiners/pipelines. Realization is they are beating their brains in and selling a valuable commodity for dimes on the dollar. Money is not going to continue to die in this arena. IMO

Peak Oil still happening....

gasandoil's picture

I hear that KansasCrude... WCS at $40 discount to WTI, which is priced over $20 below Brent or LLS makes the oil sands a waiting game for a new outlet to non-US markets. Read a lot more and feel free to contribute at

I hope the author sees this and further quantifies the number of days required to move 50 million bbl of stored crude out of Cushing. The system should balance by mid 2013 with new pipeline outlets that can be studied at this link:

The author (econmatters) fails to point out two essential details that make the Cushing storage situation a non-issue in 2013. The oil storage glut is far from "problematic" if one considers that within 6 months there will be roughly 1 million bbl per day of new pipeline capacity starting to move volume from Cushing to gulf coast markets. Seaway pipeline expansion will carry 400,000 bbl and southern leg of Keystone will carry 700,000 bbl when completed. Both projects are under construction now. The second detail overlooked by the author is that nearly all of the 700,000 bbl of Bakken daily production is delivered to railway destinations that do not include Cushing because of the roughly $20 discount of WTI to LLS. More of the Bakken production could go to Cushing by pipeline in the future

Imminent Crucible's picture

"The US has yet to take their austerity medicine." Whoops--here the author makes a blunder that calls his judgment into question. If there is anything we can take away from the last four years of our government operating without a budget, it is that the US HAS NO INTENTION of taking any austerity medicine.

It's only a matter of time, he assures us. No doubt, but not for the reasons he supposes. The U.S. will take its austerity pills when the bond markets force them down its collective throat.  I can hear the jeering already: "Heh! The Fed has been monetizing the deficit for years. Where's the collapse?"  We've had ZIRP for four years, and four years is very different from "forever". Foreign markets have already lost confidence in the Treasury debt; that's why the Fed has to pick up most of current run-rate.  How long before the foreign markets lose confidence in the US Dollar itself?  That is the $64 trillion question.

Mike in GA's picture

Yeah, denying the need for austerity is like denying gravity.  You can say you don't believe but that doesn't change the the fact the law exists. 

There IS austerity in this land right now.  Echecks from .gov cover up the soup lines and there are no haggard thin faces now but it's the .gov itself that is most destitute.  The recipients of echecks don't care about the debt or deficit.  Just send my check.

You are so right about the 64 Trillion $$ question.  That will be a day that will live in infamy.

TradingTroll's picture

Gawd, people need to study economics.

Oil is a basic input of our economy. A human can produce 100 watts. A barrel of oil has 2000 times that energy.


Cheaper oil would be a stimulus for our economy, because oil is food, oil is clothing, oil is warmth. The cheaper it is the more we can SAVE. SAVINGs create CAPITAL. Guess what you need to fund research into new drugs for diseases or new robots or new energy sources to explore space? You guessed it...CAPITAL.

LawsofPhysics's picture

Not according to modern eCONomic theory and modern banking. Capital has no cost (ZIRP) and can be created out of thin air at will. - FAIL

Nehweh Gahnin's picture

Wow, so many peeps chasing the dream, so few red arrows.

No one, including the author but possibly excepting Jumbotron and Mike in GA, appears to have a clue about the real trajectory we're going to see.  We are NOT going to see $45/bbl oil (nor the ridiculous suggestion of $25/bbl oil), because the producers can no longer pull it out of the ground for that.  Everyone on the supply side would love to see $200/bbl oil, but even the author realizes that when you get to that price, normal people aren't driving and everyone starts to understand the "buy local" meme.

Also, those bozos calling for increased fracking especially don't know shit from shinola, as exemplified by Tombstone's redneck rant.  They are laying down the wells in the Dakotas and elsewhere because the life of viable production for those wells runs on average between 18 months and 2 years.  And, of course, the costs in terms of groundwater and environmental dergadation are not even recognized, let alone priced in.  (Those costs get socialized, Tombstone.  That is your real socialism.)

Guess what, kiddies?  Listen closely ...  Those who believe that oil will continue to sustain our economy, or ever could, and those who act (or fail to act) upon that belief, are fucked.  You will be better off learning to churn butter by hand.

Fedaykinx's picture

Funny, I live smack in the middle of a huge natural gas field that's seen extensive fracking and haven't even heard of, much less seen evidence of, a single instance of anyone's water becoming undrinkable.  The only dergadation I've witnessed is in the minds of blowhards on the internet.

dtwn's picture

There were also no huge oil spills in the Gulf for 31 years until Deepwater Horizon.  We're human.  We fuck things up.  It's our perogative.  

Fedaykinx's picture

That you would even compare onshore drilling to what happened in thousands of feet of water is either more than a bit disingenuous or misinformed, possibly both.

LawsofPhysics's picture

My mother-in-law's wells went to shit after they started fracking on her property in Texas.  Like anything else humans do, I suppose sometimes they do things right and sometimes they fuck things up.  My point is, when the corporations fuck it up, they should pay and NOT THE TAXPAYER.  Really getting sick of the "I fucked up so where my BAILOUT" meme.  You fuck up, YOU pay, bitchez.

WhiteNight123129's picture

+2 we are living in an Ocean of distorted economic incentives. The good news is that we are closer to the peak than to bottom of Government and its distorted economic incentives..

Fedaykinx's picture

No offense but was it proven that the fracking activity was actually the cause?  Where in Texas are we talking about?

I'm serious, thousands of wells drilled around here.  Not one instance of water problems.  In fact many of these small municipalities have BETTER water quality than they did before fracking, because they actually have some money to update and maintain their systems.

WhiteNight123129's picture

There is one point which is missed, which is that US consumption of oil per inhabitant is very very high compared to many nations on earth, yet US is only about 4-5% of population. If takes only a few barrels of additional oil per inhabitant outside of US to make the consumption go up.

Long story short, the oil finds in US do not mean so much a plunge in oil price but a second leg boom in some emerging markets in need of oil. Very bullish for Chinese equities those oil finds in the US. 

In other words, the US demand for oil is becoming rapidly less and less the dominant factor in total demand.


TO WIT The US has 19,150,000 barrels per day consumption, vs 9,400,000 for CHINA in 2011 and yet China has 4 times more inhabitants. I do not discuss the possibility that US consumption goes down, but I think if you have the oil price go down significantly I think there is a lot of benefits for many emerging countries. I guess CHina would send twice teh number of workers they are currently sending in  Africa to get busy building more infrastructure and so on. I think that this article as a US centric view of teh demand of oil which is outdated by at least 30 years.


US oil finds bullish for emerging economies long term.


Market Analyst's picture

A drop in oil imports during the December 21 week pulled down oil inventories which fell 0.6 million barrels to 371.1 million. This is the fifth draw in the last six weeks but most of the draws, like the latest, have been small. Oil inventories remain extremely heavy, classified as well above their upper limit.

Refineries sharply increased their output of gasoline where inventories show a fifth straight major build, up 3.8 million barrels in the latest week. Inventories of gasoline are extremely heavy, moving up in classification one notch in the week to, like oil, well above their upper limit. In contrast, distillate inventories are below their lower limit though they did rise 2.4 million barrels in the week.

Product supplies in the wholesale sector, which offer a secondary indication on final demand, point to softness with gasoline down 2.8 percent year-on-year and distillates down 6.9 percent. The price of oil is down following today's report, about 50 cents lower to the $91.50 area.

Market Analyst's picture

Very bearish EIA inventory data today! builds in all the products, going down, down, down.

Downtoolong's picture

$200 oil....what Day Dreamers (Goldman)

Or bull shitters and con men who are talking their book, which I tend to believe even more. The biggest mistake you can make is taking these scumbags for fools and idiots. They will bury any company for a short term profit and bonus. We've all seen it happen, time and time again.

Imminent Crucible's picture

"Con men" is the correct term. Goldman Sachs and Vitol, the Enron of Switzerland, orchestrated the 2008 price spike using dark pool money in unreportable transactions. While they screamed "Oil going to $200!" GS and Vitol were selling and building short positions as oil approached $140. Needless to say, the other Usual Suspects were among the supporting cast of characters.

wcvarones's picture

What happens when the central bank stimulus stops being effective, and it stops altogether, and the debt issues are finally addressed?


Silly EconMatters.  Just because central bank stimulus stops being effective doesn't mean Zimbabwe Ben stops monetizing our deficits, or that Congress finally addresses debt issues.


Devaluation is the only way out.

shovelhead's picture

Or calling bailing out insolvent banks 'stimulus' to fool the wee folk...

I agree. Devaluation is the only, and inevitable, way to correct the criminal malfeasence committed on our currency.

The question is can this be done agonizingly slowly or will a collapse cause the reset? Either way, the pain will take years to recover from and many will be eaten alive.

But it's coming.

LawsofPhysics's picture

Clear the bad debt and prosecute the fucking fraud. Things will continue to deteriorate so long as the moral hazard reamins and there are no real consequences for bad behavior.  until then nothing changes.

bigkahuna's picture

Devaluation by half will double government spending due to price inflation in terms of the currency devalued. If ever there is an outright dollar devaluation, get your wheelbawrrows out. Washington DC will keep on informally devaluing by printing until the currency hits the critical mass and goes into the dirt.

We can still trade these green pieces of paper for stuff domestically and internationally. Devaluation will only put a quick end to that. The current policy of slow death inflation by printing allows the worthless paper to still be exchanged for stuff. 

NotApplicable's picture

Silly indeed!

We have had paper recessions thanks to the actions of the Central Banks for the most part, but a true organic recession started by out of control input costs cannot be alleviated by any central bank planning, and that is what Goldman Sachs failed to realize.

Anybody who fails to understand the nature of GS's "failures" is living fully within the Matrix. That they could so easily debunk the $200/bbl yet not expect GS to do the same analysis???


It is at times like these when I question whether one of us from a distant planet, as we are not of the same kind.

Snakeeyes's picture

Devaluation is a costly way out. But gov't will never cut spending in a meaningful way and there isn't enough tax revenue to pay for any of it.

Foul Harold's picture



The article assumes a rational response by The Bernank and TPTB  to the diminishing marginal utility of debt monetization.  I expect no such rationality.

NotApplicable's picture

The rationality of stealing everything not tied down though...

Tombstone's picture

The Dictator may have gotten an A+ in Propaganda 101, but he gets an F- in  Budgeting 102.   About the only thing that might save America and the economy is a boom in energy, provided the government doesn't demand more green energy waste and fraud instead.  However, the main point is well taken as infrastructure to get us there is woefully lacking.  You can blame the global warmers and their monkey-wrenching of the fossil-fuel expansion, simlpy because they hate Big Oil with an unbridled passion.  So, it wouldn't stun me to see us regress to the dark ages as fracking is banned and solar panels and windmills become the dictate of the day.  That is where socialism is taking us, pronto.

tango's picture

I never thought of myself as a socialist for using solar panels! Face it, the best energy is photosynthesis followed by solar. The former is the most efficient possible and produces no heat. Solar is abundant and is quickly be comic economically viable as costs drop and efficiency skyrockets.

I was raised in a gas station so I have nothing against oil except that it's hard to get, transport and refine, it pollutes and its cost is the opposite of stable.

NEOSERF's picture

Three points:

1.  Number of rigs seems to be declining yet storage going through the roof

2.  usage is declining in the US significantly - why

3. Oil headed to $45 bbl finally gives the economy the ability to fend off depression if we wanted to allow Israel to hit Iran.

snblitz's picture

2.  usage is declining in the US significantly - why

Global warming.  No one needs to heat their homes.

Element's picture

Problem; Israel can't hit Iran more than a slight bitch-slap, but Iran can hit them back hard from several directions at once. So the Israelis way is to get the USN to do it. Doubt that, the Iranians can hit it hard too.

The 45bbl can't fend off depression, it can only soften a recession, but slow in = slow out.

(I tell my girlfriend this ... she says yes!!)

Bicycle Repairman's picture

Cheap oil is the only way out.  Start drilling.

LawsofPhysics's picture

How will drilling make oil cheap? Especially if the energetic and capital costs of drilling are increasing exponentially? Try talking to someone who actually drills those wells.

LawsofPhysics's picture

Where dipshit?  Wake up and go talk to one of these engineers, there is no more "low hanging fruit" or "easy to drill" oil.  That is the point.