This page has been archived and commenting is disabled.

GULF COAST PADD 3 The New U.S. Oil Bottleneck

EconMatters's picture




 

By EconMatters

 

As Cushing supplies decline due to increased logistic options out of the storage hub in the Midwest PADD 2 in Cushing, Oklahoma inventories are rising to elevated levels in the Gulf Coast which eventually will provide the bottleneck and back up oil flows all along the supply and logistics chain.

 

 

 

 

 

The shortsighted obsession of building and expanding pipelines out of Cushing, just to store it on the gulf coast serves as an important reminder to look at problems more broadly, without an aggressive oil export market (even with increased refinery capacity for petroleum products along the Gulf Coast) there is just too much domestic and North American Oil with no place and market destination to soak up this extra production.

 

 

One doesn`t just all the sudden start pumping over 8 million barrels of oil a day and drastically reducing foreign imports without providing unintended consequences for supplies which have been elevated for years in the United States currently standing at over 380 million barrels and climbing with over 200 million alone being stored along the Gulf Coast in PADD 3.  

 

The geniuses in the oil market thought all they had to do was build more pipelines out of Cushing Oklahoma and the glut of domestic oil was solved, not really taking into account the demand fundamentals of supply and demand. Just moving oil from one bottleneck to another bottleneck a few states over doesn`t address the core problems of oversupply and lack of economic demand to soak up additional supply globally with weak emerging markets and increased fuel efficiency standards and changing driving patterns in the US its strongest market. 

 

 

 

At what point does the bottleneck along the Gulf Coast just back all the way back to Cushing, Oklahoma again? Thus completely mitigating all the capital and resources spent on increasing pipeline capacity out of the energy hub where even with the recent declines are still above their five year historical averages. How much oil are we going to store in this country? It is obvious that supply is more than demand and the reason that despite a huge reduction in imports in the largest market for demand oil supplies are near record levels in the United States.

 

 

Another question is what does the WTI contract represent? Does it strictly represent Cushing Oil or is it a proxy for domestic US Oil? Does it really matter if you move Oil two states over from one storage hub to another? Have you really solved the glut of US Oil supplies? It is not like anyone actually takes delivery of the WTI Cushing based contract in a well-supplied energy market, less than one percent of one percent of oil traded takes physical delivery. This shell game of moving oil from one PADD 2 storage hub to another PADD 3 storage hub doesn`t address the core problem and the rise in PADD 3 Oil supplies makes this abundantly clear. 

 

There is just too damn much oil stuck in the United States with no real market for it to go to given the unprecedented increases in North American and US domestic Oil production of the last three years. This is the big picture issue that still needs to be resolved in the oil energy space and just increasing refinery capacity along the Gulf Coast isn`t enough to solve this supply glut as the rising PADD 3 inventories point out in the latest EIA reports.  

 

© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 03/29/2014 - 16:02 | 4605916 dizzyfingers
dizzyfingers's picture

https://www.youtube.com/watch?v=vdSjyvIHVLw

claudesv

3 years ago   There is no "fossil fuel" of course. As said Sir Fred Hoyle: "The suggestion that petroleum might have arisen from some transformation of squashed fish or biological detritus is surely the silliest notion to have been entertained by substantial numbers of persons over an extended period of time."

Sat, 03/29/2014 - 18:02 | 4606213 Redneck Hippy
Redneck Hippy's picture

Hoyle was an astronomer and a science fiction writer,obviously not a geologist or a biologist.

Fri, 03/28/2014 - 16:41 | 4603687 moneybots
moneybots's picture

"There is just too damn much oil stuck in the United States with no real market for it to go to given the unprecedented increases in North American and US domestic Oil production of the last three years."

 

I thought the whole point of drill baby, drill, was to make us energy self sufficient.  I don't see how this is a problem.  For what reason do they need to keep production above the level of consumption?

Sat, 03/29/2014 - 18:05 | 4606219 dizzyfingers
dizzyfingers's picture

moneybots  Bigger market = more control. Every corporation and government wants to control more sheep, I mean people.

Sat, 03/29/2014 - 18:03 | 4606216 Redneck Hippy
Redneck Hippy's picture

So how come the price of oil hasn't come down in the face of such abundance?  I smell investment bankers in the mix somewhere.

Fri, 03/28/2014 - 16:29 | 4603558 ebear
ebear's picture

comment misposted - see below

Fri, 03/28/2014 - 15:12 | 4603395 earnulf
earnulf's picture

Basically, the link between Supply and Demand is broken, thus gas prices at the pump have no relation to supply and demand, just the bid price on WTI.

Used to be, with many small refineries across the nation, you had a spread out demand that was pretty stable, now, in our centrally planned, one size fits all conglomeration, you have refineries hundreds of miles from POS who are trying to cover thier costs and make a profit, thus they can't afford to have the price go down. (their labor is the same whatever WTI is).

Can you still say price fixing?    Drop the frickin price of fuel to $2.00 gal and watch the oversupply vanish.

Fri, 03/28/2014 - 14:54 | 4603333 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

I must be the only person who had to look up the meaning of PADD. Did a Google and learned that it means Petroleum Administration for Defense Districts with the number a reference to the states which comprise 1 of the 5 districts.1a-c is the east coast with 5 the west coast. The 2 in the article are PADD2, Midwest, PADD3, Gulf Coast.

 

Learn something new everyday on ZH.

Fri, 03/28/2014 - 14:13 | 4603185 RMolineaux
RMolineaux's picture

What a joke!  The US released 5 million barrels from the petroleum reserve "to teach the Russians a lesson."  This in face of the supply glut described above.  The price dropped slightly and briefly, then went back up again.  The Russians must be laughing.  Why does the price not go down?

Fri, 03/28/2014 - 13:38 | 4603052 litemine
litemine's picture

Refill the Emergency Reserves.  Aren't they down?   Something wicked this way comes.

Fri, 03/28/2014 - 13:38 | 4603049 Lord Koos
Lord Koos's picture

And yet prices are still high...

Fri, 03/28/2014 - 14:41 | 4603298 Citxmech
Citxmech's picture

"Oversupply," in this instance, is another way of saying "demand collapse."  Of course this "oversupply" is mostly coming from low EROEI, hight cost, quickly depleting shale and tar sands development that can't just be temporarily shuttered every time prices fluctuate.

This article is only presenting half the story.

Fri, 03/28/2014 - 13:09 | 4602925 Stud Duck
Stud Duck's picture

We the largest NET exporter of REFINED fuels. we import crude for refinement, export it back to Mexico, South American countries, . I hink they need some of that polution for themselves, but Louisanna and Texas would rather have it for their people to breathe.

Fri, 03/28/2014 - 07:46 | 4601893 Meta_Consciousness
Meta_Consciousness's picture

Is that 1% of 1% figure accurate?

 

Only that much takes physical delivery? Does that mean that supply and demand doesn't exist for the physical product ( at my local ethanol free gas station)? The demand only effectively exists for paper, right?

 

 It makes sense now that supply of physical goes up, demand stays flat even with population growth and prices rise rise rise.

 

What difference, at this point, does it make? I'm going to go drive 70 miles today to do a job I could more effectively do from home.

 

 

Fri, 03/28/2014 - 16:02 | 4603560 negative rates
negative rates's picture

They were planning on filling a lot of pot holes with that stuff, now they can't refine it fast enough but the need is still there, which is why the oil was sent there in the first place. It's prolly political, switching over would raise the price the price of gas because of less capacity had they switched. He messed up and will never admit it. 

Fri, 03/28/2014 - 12:44 | 4602852 Zerozen
Zerozen's picture

Almost no one takes delivery through the contract expiry because it's a huge pain in the ass. The process is called ADR and ties up for almost a month the full value of the oil that's being bought/sold. So at $100/bbl, if you buy 100 lots of oil this way you have to post $10 million in cash with the exchange.

The vast majority of traders will just do an EFP right before expiry, direct with a counterparty, no exchange involvement, much cheaper and easier.

Fri, 03/28/2014 - 14:05 | 4603152 Meta_Consciousness
Meta_Consciousness's picture

Thanks.

 

The more I learn the more I know how little I know. And I think I heard that phrase somewhere, I don't take credit for it.

Fri, 03/28/2014 - 02:26 | 4601665 yt75
yt75's picture

 

 

 

Reminder : The US is still NUMBER 1 net oil importer (or 2 just behind China)

http://mazamascience.com/OilExport/output_en/Exports_BP_2013_oil_bbl_US_MZM_NONE_auto_M.png

 

The issue with respect to oil infrastructure in the US and current US domestic production is more about gulf coast refineries being built for heavier crude than the light crude coming from tight oil (Bakken, Eagle ford)

 

The oil bonanza very much started in the US, and the US was for a long time top producer and top exporter

The US became a net importer around 1948 (US consumption > US production)

The US passed its production peak in 1970 (maximum extraction flow, barrels per day)

The US was still number 1 producer by far at that time.

This US peak was also the main reason for the first oil schock by the way, much more than the "arab embargo" little song (together with rebalance between majors and countries on barrels revenus percentages, and dropping B Woods in 71 and associated $ devaluations)

The US will never be a net exporter of oil anymore (besides dramatic reduction in consumption)

As to natural gas, the situation :

http://mazamascience.com/OilExport/output_en/Exports_BP_2013_gas_ft3_US_...

The US is still a natural gas net importer.

Production currently flattenning.
The US will never be a major gas net exporter.

The only reason for the current fuss about gas export, is just about the gas extracting industry wanting the US domestic gas price to rise, that is all.
In terms of potential impact on the world market : zilch, zero.

Interest of US extracting industry to frack in Europe (or Russia) is another thing, also the reason for the current US Stalinist propaganda at maximum volume.

 

 

Fri, 03/28/2014 - 16:28 | 4603648 ebear
ebear's picture


"The oil bonanza very much started in the US, and the US was for a long time top producer and top exporter"

Beg to differ.  

The world’s first offshore wells and machine-drilled wells were made in Bibi-Heybat Bay, near Baku, Azerbaijan. In 1873, exploration and development of oil began in some of the largest fields known to exist in the world at that time on the Absheron peninsula near the villages of Balakhanli, Sabunchi, Ramana and Bibi Heybat. Total recoverable reserves were more than 500 million tons. By 1900, Baku had more than 3,000 oil wells, 2,000 of which were producing at industrial levels. By the end of the 19th century, Baku became known as the "black gold capital", and many skilled workers and specialists flocked to the city.

http://en.wikipedia.org/wiki/Caspian_Sea

The Texas oil boom didn't begin until 1901, 28 years later.

Sat, 03/29/2014 - 18:12 | 4606240 dizzyfingers
dizzyfingers's picture

ebear

 That was after the first oil rush in Pennsylvania.  https://en.wikipedia.org/wiki/Pennsylvania_oil_rush

The Pennsylvania oil rush was a boom in petroleum production which occurred in northwestern Pennsylvania from 1859 to the early 1870s. It was the first oil boom in the United States.

The oil rush began in Titusville, Pennsylvania, in the Oil Creek Valley when Colonel Edwin L. Drake struck "rock oil" there. Titusville and other towns on the shores of Oil Creek expanded rapidly as oil wells and refineries shot up across the region. Oil quickly became one of the most valuable commodities in the United States and railroads expanded into Western Pennsylvania to ship petroleum to the rest of the country.

By the mid-1870s, the oil industry was well established, and the "rush" to drill wells and control production was over. Pennsylvania oil production peaked in 1891, and was later surpassed by western states such as Texas and California, but some oil industry remains in Pennsylvania.

Fri, 03/28/2014 - 15:59 | 4603547 negative rates
negative rates's picture

Store that goop in the SPR!

Do NOT follow this link or you will be banned from the site!