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Seaway Pipeline No Panacea for Cushing's Oil Glut

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By EconMatters


EIA Report 


The weekly EIA report came out today and one of the noteworthy data points was the Cushing, Oklahoma storage numbers. Already at a record, Cushing added another 1.8 million barrels to storage sending total Cushing stocks to 51.9 million barrels of oil in storage facilities at the energy hub.

 

There has been 6.3 million barrels of oil added to Cushing during the last 6 weeks. To put these build numbers into perspective, Cushing oil inventories stood at 28.3 million barrels for this time a year ago, which is a build of 23.6 million barrels in a year.

 

 

 

Seaway Pipeline Expansion


The Seaway pipeline was recently expanded to 400,000 barrels per day from 100,000 barrels per day, and many analysts have predicted that this would solve the Cushing oil glut. But it is looking more and more that what the Seaway pipeline offers is a cheaper mode of delivery out of Cushing, and the real benefit is one of logistical optionality for transportation.

 

Further Reading - Keystone XL Pipeline: Economics, Idealism and Politics


However, it is shaping up due to the sheer size of these build in inventories at Cushing that the Seaway pipeline is not a magic solution for the supply and demand fundamentals at play in the oil industry in the United States, there is just more US production, than there is US infrastructure in place to deal with the trending upturn in this production.


Oil is Fungible 


In short, the US and global oil model isn`t set up for the United States to be producing more than 7 million barrels of oil per day. Even if the Seaway pipeline could send 4 million barrels of oil out of Cushing, it wouldn`t make a difference because Oil is fungible, so without major cuts somewhere else in the global supply chain, then you’re going to have supply andstorage builds somewhere in the supply chain.

 

 

Saudi Arabia can only cut back production so much 


The Saudi`s have already cut back production to fifteen month lows, how long is that going to continue as they need oil revenue just like everyone else? So Cushing is just a reflection and end point for the delivery of increasing US production, which ultimately is building more than there is demand from refiners for producing products, even with an increase in exporting of gasoline and other petroleum products.

 

Cushing never was landlocked 


This should have been apparent to analysts as rail has been delivering Oil to refiners during this domestic boom, and so are barges taking oil out of Cushing, so large amounts of oil are getting to refiners. Some of it before it even gets to Cushing, and some after with the Seaway pipeline, and barges out of Cushing; and with the spread in 2012 of as much as 25 dollars, there were major incentives to get US oil to refiners in a myriad of ways.

 

 

Cushing builds reflective of bigger problem


Yet we have almost doubled Cushing`s inventories in a year. This points to a much bigger problem with analysts missing entirely, thinking this was just a Cushing log jam problem. This is seeing the trees, and missing the overall forest, Cushing is just a reflection of the bigger problem, there is just too damn much oil sloshing around the world right now with nowhere to go.

You see this in stories about Nigerian crude for February delivery being unsold and stuck on cargo ships because there are no buyers with the increase in US domestic production. Iraq is producing more oil, and they need the revenue so expect more oil coming out of Iraq for the next decade with each year producing more than the previous.

 

The world is producing more oil than is consumed each day 


The world global supply chain is producing more oil than the world needs every day, and this means storage has to build somewhere, and whether it is Cushing, or Nigeria, or China it has to be stored somewhere.

 

In the US, Cushing has expanded storage facilities the past couple of years, and has been a default place to send the extra oil. But even Cushing is rapidly reaching capacity limits, and even if on the margin the Seaway pipeline takes out more oil, refiners can only handle so much more before they become the bottleneck in the equation.

 

US Refineries not easy to build 


Remember, refiners are not easy to build, and the US has only relatively recently ramped up domestic production, so even with substantial increases in fuel exports, there just are not enough US refineries to handle the increase in US oil production. In short, the oil model of the last decade was not set up with the US being a major producer. The US production increases is throwing the global supply models a major curve ball.

 

Therefore, the only way that Cushing inventories are going to go down substantially is if more US refineries are built, and that could take three to four years, if they are built at all given the regulatory and financial hurdles that have prevented progress in this area over the last decade.

 

Unintended Consequences 


The bottom line is that the Seaway pipeline is no cure for what ails Cushing inventory builds. For what ails Cushing is the fact that nobody thought about the unintended consequences of a boom in US oil production due to high prices for the past decade.

 

The global economy has slowed down from the peak in 2007, but prices have remained high, this resulted in increased production projects globally, and the rise in US production just sent the supply levels over the edge.

 

Furthermore, nobody ever planned or expected that the US would start producing with these numbers ever again. This has thrown the whole supply chain on its back, Cushing is just a reflection of this fact, there is more oil than the world needs right now, and the world definitely didn`t need an increase in US production.

 

Cushing builds still a problem 


As a result you get Cushing, the manifestation of what happens when the unexpected happens before the oil models know what to do with the extra supply. You do not get the kind of builds at Cushing, with a new pipeline in existence for six months, a hefty spread, and rails transporting oil at unheard of levels, unless there is a much bigger problem than just increasing the Seaway pipeline by 300,000 barrels per day.

 

The Seaway Pipeline just steals business from Railroads & Barges 


So Seaway doesn`t solve the Cushing problem as many have hoped. All Seaway does is maybe take some business from barges and railroads in the transportation of the product.

 

But the problem was much bigger than these people ever realized, because Cushing never represented a landlocked, logistics equation.

 

Cushing builds represents the fact that right now there is just too damn much oil that is being produced versus consumption needs for that oil. So it has to be stored somewhere, and Cushing is one of the places.

 

Too many chefs in the kitchen 


The real problem is that nobody ever planned for the US to be producing 7 million barrels of oil every day and rising, there is just not enough demand in the world for this extra oil, so it has to be stored because everyone needs the money these days. And until prices drop substantially, no one is going to cut back producing this black gold.

 

Further Reading - Physical Delivery Needed in Agriculture and Energy Markets


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Thu, 01/17/2013 - 09:30 | Link to Comment Winston of Oceania
Winston of Oceania's picture

Oil is just barely if at all fungible, WTI is NOTHING like that shit from Hugo or the Prince of Persia...

Thu, 01/17/2013 - 09:27 | Link to Comment I am more equal...
I am more equal than others's picture

There is peak a boo.

Peak oil.

Peak population.

and finally the Peak of Lies.

Thu, 01/17/2013 - 09:16 | Link to Comment HowardBeale
HowardBeale's picture

Zerohedge, home of the oil-shorting "journalist" traders. The only "glut" here that "the world is not designed to handle" is the vacuous black hole in the writer's head.

Thu, 01/17/2013 - 09:40 | Link to Comment Irelevant
Irelevant's picture

The writer is probably a Magueri fan :) We are swiming in oil! Fuck yeah! Why is it 2 euros per/l in Europe?!?

Thu, 01/17/2013 - 09:06 | Link to Comment Jack Sheet
Jack Sheet's picture

The elite is not interested in low oil prices. Same story as with gem diamonds.

Thu, 01/17/2013 - 09:27 | Link to Comment forwardho
forwardho's picture

Agree, Jack.

The logic behind the cushing "stored oil" is the same logic used in debeers london vaults.

Money is borrowed against assets "held in hand" at todays prices.

Even if there is not adequate demand for current supply.

Induced scarcity?

Thu, 01/17/2013 - 08:59 | Link to Comment dscott8186
dscott8186's picture

The only reason why the price of oil is so high are the problems in the Middle East.  Only good can come out of increasing US domestic production thereby putting downward pressure on the price of oil and cutting out the violent extremist governments in the M.E. from harming the rest of the world.  After all, oil is fungible and so more oil here, i.e. not imported, means more oil for the rest of the world.  

As we found out from the source of the fracking opposition, M.E. oil interests are the financial source of the issue.  The M.E. oil cartel is opposed to any increase in oil production anywhere which would harm their profit margin and therefore funds to buy arms for violent Jihad.   The less oil produced means the higher the price of oil.  

Thu, 01/17/2013 - 08:52 | Link to Comment de3de8
de3de8's picture

The plan will ensure that you will never see "cheap" fuel ever again.

Thu, 01/17/2013 - 08:53 | Link to Comment NoDebt
NoDebt's picture

This is a problem?  Sounds like a high class problem to have.  Good thing prices are manipulated or this could be an unmitigated disaster for everyone (except the consumer- but who gives a crap about us plebes).

I had heard that although there hasn't been a new refinery built in the US for decades that upgrades to existing refineries have been adding the equivalent of 1 new 1970s-era refinery to overall refining capacity every year.  I don't know if that's true.  Perhaps those with more knowlege of the refining industry than myself could chime in with some data about that.

Thu, 01/17/2013 - 08:50 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

Somebody wake up the oil drum crew.  Heresy is being committed here.

Thu, 01/17/2013 - 09:42 | Link to Comment hardcleareye
hardcleareye's picture

Good AM BR....  Yes... heresy has indeed been committed here...lol

I was reading this "article" and thinking about a basic economic concept called DEMAND DESTRUCTION....  when the price of somethings becomes so expensive that people stop using it...

The author has not touched on the cost of "getting the oil out of the ground and to the refineries"....  if prices fall you will see "the bust" cycle inflected on the producers...  supply will fall and price will come up again.. next time higher.  It has always be thus..... cheap easy to produce oil is gone in the US..  these new found "reserves" have always been know but have until now have never been economical viable to produce... (I can cite sources if needed)

For example Canadian tar sands need between $80 to $100 a barrel to break even (depending on who's sources you look at)... 

There will be no new refineries because TPTB realize that there will be no "new" demand (people cannot afford to purchase the quantity of fuel they use to be able to afford in past times...).   They are currently closing refineries in the NE because they do not have enough demand for the finish product and the margins are to too tight to be profitable (and yes I am aware that there are other factors involved in this.....).

So ...  in the words of ROCKMAN

"But every oil consumer in the world has all the oil available to them today that they can AFFORD. Excluding local distribution problems not one American has been denied an ounce of gasoline that they could AFFORD to pay for. For these citizens not only has the world not run out of gasoline but it's not even in short supply: they can buy as much as they want...as long as they can afford it...."  

This my friend is Peak Oil.......  the world will never run out of oil....  you just may not be able to afford purchasing it!

 

L

Thu, 01/17/2013 - 17:02 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

There's lots of things that are getting harder for the average joe to afford.  Food for one.  Given the state of the economy and politics it is no surprise that gas and oil are also less affordable.  But the price of oil in gold or silver is unchanged since the 1960s.

It is the state of the economy and those that (mis)manage it.  Peak oil is a convenient lie created to excuse this mismanagement and venality.  There's plenty of energy.  If the corruption could be wrung out of a completely manipulated "market" it would be apparent.

Thu, 01/17/2013 - 08:48 | Link to Comment dscott8186
dscott8186's picture

Something doesn't add up here in the analysis.  First off, we don't import refined oil products to any significant degree even back in 2007 at the peak of consumption. Gasoline and diesel consumption is down since 2007.  So how can we say that US refining is apart of the bottleneck? Unless there has been a significant reduction in existing refining capacity due to the incompetence of government regulations by the EPA should be sufficient. Doesn't make sense.  

Note that on the East Coast an Obama contributor purchased a major oil refinery that was slated to be shut down in 2012 contingent on the exemption from the EPA rules. The wind down of that refinery output until the purchase placed upward pressure on the price of gasoline for a time.   It is the movement of crude oil from new places that is at issue.

Then we are told that the barges and railroads are being negatively affected with the Seaway pipeline improvements.  Well, that is expected since every normal capitalistic enterprise seeks to reduce costs to increase the profit margin and reduce the retail price to expand market share.  Why would that be a problem for the US consumer?  It's not.  This smacks of the same reason why Obama refused to sign off on the Keystone XL pipeline deal, the railroads would be negatively impacted, i.e. Obama's campaign contributor...Warren Buffett.  

Finally, we need to factor in the increasing use of relatively cheap fracked natural gas that is changing the consumer energy usage.  Many businesses/industries are making the switch from diesel to natural gas creating a further downward pressure on oil by-product consumption.  Some large coast to coast trucking firms are making the switch from diesel to natural gas. Even railroads are experimenting with switching to LNG.  This would be a game changer if that happened. That is to say, today's kerfluffle about transporting oil will soon resolve itself.  Then someone is going to complain about not enough pipelines for natural gas distribution. 

Thu, 01/17/2013 - 10:10 | Link to Comment disabledvet
disabledvet's picture

Nat gas is the game changer cuz the price has collapsed and it's already a refined product. There is "bunker fuel" which is just raw oil out of the ground. This can be used as fuel in certain engines. Also we have ethanol with I am told costs a buck a gallon. Bottom line is this author is only showing his ignorance of the energy industry by presenting the story as one of "we must export to support price" ala Larry Kudlow. What we need is a price reset to encourage consumption, increase cash flows and improve the economy. With interest rates this low there is no way "exporting" is in any way a "solution." simply put the only people who can create dollars...and what we have is a dollar shortage...are the American consumers....and the banks of course.

Thu, 01/17/2013 - 08:24 | Link to Comment Navymugsy
Navymugsy's picture

How dare you print this story! PEAK OIL DAMMIT! Give us all of your money and be quick about it!!!!!

Thu, 01/17/2013 - 08:16 | Link to Comment Ralph Spoilsport
Ralph Spoilsport's picture

Reducing US dependence on foreign oil producers is now a negative? If we had enough refining capacity in the US to get rid of the storage problem at Cushing, would there be enough worldwide demand for US refined products to make it profitable? Obviously, the US economy is to blame here. We should all buy large SUVs and start driving around aimlessly, preferably at high speed with under-inflated tires. (/s)

Thu, 01/17/2013 - 08:14 | Link to Comment Manolo
Manolo's picture

LOL! What worldwide oil glut ?  > (Why is my gas still so expensive...) 

Thu, 01/17/2013 - 22:07 | Link to Comment Market Analyst
Market Analyst's picture

The US now exports extra gasoline, We subsidize exports, I know another scam by oil refiners!

Thu, 01/17/2013 - 09:28 | Link to Comment Winston of Oceania
Winston of Oceania's picture

Oil is priced in dollars, we keep printing more dollars and therefore oil keeps your pockets from burdening you so much... Misallocation of resources or Central Planner market intervention is a VERY VERY bad thing.

Thu, 01/17/2013 - 08:06 | Link to Comment Peter Pan
Peter Pan's picture

Perhaps they could store all that spare oil on the massive number of cargo ships that are effectively idle. Just a guess as I am not an expert.

Or how about an empty dam with a plastic cover.

Or how about all the cars in showrooms being given a full tank.

Thu, 01/17/2013 - 08:00 | Link to Comment apberusdisvet
apberusdisvet's picture

I just love the smell of price manipulation in the morning; but then again, what isn't manipulated these days?

Thu, 01/17/2013 - 03:27 | Link to Comment Cult of Criminality
Cult of Criminality's picture

"(Why is my gas still so expensive...)"

The excuse is not enough refineries.(greed)

Thu, 01/17/2013 - 00:39 | Link to Comment JohnG
JohnG's picture

 

 

Peak Cushing?

(Why is my gas still so expensive...)

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