The First Warning Sign That Cushing May Be About To Overflow

Tyler Durden's picture

To be sure, the rumors have been there for a while.

As we first wrote in March of 2015 when it became a topic of conversation, speculation that Cushing may fill, and even overflow, has been around for nearly 10 months.

As we reported then, there were floating predictions that Cushing may top out as soon as the summer of 2015.

In retrospect, these forecasts underestimated just how "stretchy" US commercial storage can be; they also ignored how many millions of barrels could and would be stored at sea even though the contango in recent months had made such storage virtually unprofitable; the recent change in the US oil exporting law helped, and much of the excess inventories were carted off toward Europe which allegedly has more oil excess capacity than the US.

However, as overproduction continues, even the highly adaptive US storage system appears to be reaching its limits. Recall that the primary reason why Goldman envisions $20 oil as a possibility is because US storage capacity will be reached.

 

Then yesterday, the EIA itself in a blog post took on the topic of soaring inventories.

This is what it said:

Several factors have played a part in pushing U.S. crude oil prices below $30 per barrel (b), including high inventory levels of crude oil, uncertainty about global economic growth, volatility in equity and nonenergy commodity markets, and the potential for additional crude oil supply to enter the market. Crude oil and petroleum product inventories, both domestically and internationally, have been growing since mid-2014 and are above five-year averages for this date.

 

graph of difference in inventory levels as of January 22, 2016 to previous 5-year average, as explained in the article text

 

Although there is still traditional, on-land storage space available, higher inventory levels and expectations for global inventories to continue building in 2016 are lowering crude oil and petroleum product prices for near-term delivery:

  • Total U.S. commercial crude oil inventories as of January 29 were 503 million barrels, 132 million barrels above the 2011-15 January average. This marks the first time that U.S. inventories exceeded 500 million barrels.
  • Crude oil inventories at Cushing, Oklahoma, the delivery point for the West Texas Intermediate (WTI) futures contract traded on the New York Mercantile Exchange (Nymex), are 23 million barrels above the five-year average as of January 29.
  • Total U.S. distillate inventories (which include heating oil and diesel fuel) are 22 million barrels above the five-year average, and motor gasoline inventories in the United States also recently moved above historical averages.

But it was only today that we got the loudest alarm bell yet, suggesting that an "overflow" of Cushing may all too real in the not too distant future.

According to Reuters, the unprecedented build-up of surplus crude oil supplies in Cushing, Oklahoma, is beginning to cause logistical headaches for companies moving crude between thousands of steel tanks in the nation's most important storage hub.

For one company, Enterprise Products Partners, which is a large participant in the Cushing market, this means telling at least some counterparties that it is experiencing delays in delivering crude from its tanks, Reuters said citing three sources who were informed of unspecified "terminalling and pump" issues.

Alarm bell #1:

"The sources attributed the disruptions to the unusually high level of oil collecting in Cushing, the delivery point of the CME Group's U.S. oil futures contract. Stockpiles have risen to a record 62.4 million barrels as of last week, according to the U.S. Energy Information Administration, just 9 million barrels shy of their theoretical limit."

 

"It's hard to move barrels around right now because there's so much oil (in Cushing)," said one trader.

And if it's hard now, imagine what will happen in a few weeks let alone months, when 1-2 million barrels in excess production is dumped in Cushing courtesy of the relentless Saudis and Iranians.

For now at least, it's not a panic: "The delivery delays are unusual but not severe enough to trigger contractual disputes, one source said. Oil traders routinely pump crude in and out of tanks in Cushing in order to settle futures contracts or create particular blends for refiners. Most trades are usually completed within a month's time."

However, that is about to change:

The hiccups may be a sign of things to come as traders fear a further increase in stocks at Cushing would test the upper limits of tanks and cause the next leg of an 18-month rout.

Alarm bell #2:

Enterprise owns just 3.3 million barrels of storage capacity in Cushing, small relative to operators like Enbridge Energy Partners with over 20 million barrels. It is not clear how much space the firm may have leased from other owners. But traders say they remain one of the larger players in that market, and first noticed that something was awry when Enterprise began bidding to buy the Feb/March WTI cash roll earlier on Thursday, indicating that they were potentially short barrels for immediate delivery.

 

The cash roll, which allows traders to roll their long positions forward, traded at larger volumes at negative $1.00 a barrel on Thursday. Those deals raised questions among market participants as the roll does not actively trade outside of the three-day window after the settlement of the front-month futures contract.

To be sure, this is not the first time the roll was negative: a few weeks ago, during the official roll period, it traded at negative $1.95 a barrel.

However, it is becoming increasingly recurring and certainly more acute.

The problem, the sources say, appears to be related to oil volumes being so high in Cushing that there is not enough room to drain existing tanks to blend oil to West Texas Intermediate specifications.

For now, only the smaller firms are affected which is a useful warning sign. Because if and when the large guys like Enbridge get in trouble and are no longer able to store the millions of barrels on location, we won't learn about it in advance. Instead what we will see is the price of oil suddenly plunging by 5%, 10% or more percent, as attempts to clear and dump excess inventory spread like wildfire across the market.

So for those who are still long oil on hopes of some major supply disruption, or some miraculous surge in demand, consider this a fair warning that very soon things may change.

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One And Only's picture

Deliver it to the Flint River. Have people store it in their bathtubs.

Truther's picture

Deliver it to BaBa Yellen, she can use some oil.

knukles's picture

So we do need that pipeline to Canada, after all.  Gotta send our excess to somebody, eh?

NoDebt's picture

I'm so going to buy a Cadillac Escalade with a twin turbo kit on it that makes 900HP.  Somebody's gotta use all this extra oil and I'm just the guy to do it.

 

Boris Alatovkrap's picture

Boris is purchase whole fleet of Lada Priora!

knukles's picture

Are those Rooskies from Canada?

BarkingCat's picture

No, Canada is where they go when they are tired of the cold weather.

Nutsack's picture

Excellent article. This is what I come here every day for.

knukles's picture

Becoming enamored with the new Ford Coyote engine.  Monster.  In the new GT 350. 
Crate sells for $15,999.  Thought of dropping one into the old Jag S-Type, but at 15K it's just a dream
Fantasy Motoring.  Plus at my age I rarely speed anymore unless my mind has wandered off.  Not to say I don't get up to speed ... 
Huh?  What pedestrian?  Oh, that?  That's just a dent.  I dunno?  Ah, shit'll rub out.

Father Thyme's picture

Becoming enamored with the new Ford Coyote engine.

Me too! I'd like to drop one in a Factory Five '33 Hot Rod kit.

Wahooo's picture

Can you drop one into a Tesla? That'd be cool, revving up a Tesla at every stop lights and burning some rubber.

matagorda's picture

An electric motor can beat any similarly powered gasoline engine because all power is available at the lowest RPM.  That's why sporty hybrids don't deliver much fuel economy.

KnuckleDragger-X's picture

Amazing that the paper oil has been pushed up, so somebody  thinks they can make their bonus check........

MoHillbilly's picture

And have the oil get contaminated, are you crazy?

HardlyZero's picture

Pour it down that gas leak hole in Porter Ranch, California...its a big gas filled vat and oil would do the trick...swap gas for oil.  Plug it right up.

franzpick's picture

Spray-bomb any Cushing overflow with BP's leftover corexit.

Squid Viscous's picture

as long as the real culprit Ben Shalom gets dragged down a bowling lane and beaten to death with a bowling pin... everything will be back in karmic balance

optimator's picture

Squid, if you're serious just wait for him around the El Al Airline ticket counter and you'll see him.  He'll be busy paying extra for some very high weight luggage!

MsCreant's picture

I'm surprised the excess inventory at sea is not being "terrorized."

KesselRunin12Parsecs's picture

It's because, they haven't finished clubbing the seals or nuking the whales yet... & besides, the SQUID are already too fat & lazy to get their tentacles dirty.

Antifaschistische's picture

so when the marginal producers who continue to pump regardless of price because any cash is better than no cash may soon be told---we don't want your stinking oil at any price.  THAT's when the SHTF moment really occurs.

MsCreant's picture

In all seriousness, this is scary shit. There will be a backlash on the down side as we drink down this milkshake, producers go out of business, and the rigs are shut down. That this kind of thing has never been seen before should be scaring the shit out of more people than me. 

I keep waiting for supply chains to fail to start seeing the collapse in living color, 3D. This may not be obvious, but to me, this looks like the beginings of real rumblings of the infrastructure starting to rip itself apart.

new game's picture

seriously, it will createhuge problems. epic supply disruption courtesy of da fed. and the dots will nary be connected. blame, plenty to go around, ha. bushes falt...

KesselRunin12Parsecs's picture

Scary what? The IOWA caucuses are over... Now maybe a lightbulb will go off in some dimwitted politicians head that we shouldn't ougghta be burning our FOOD to make gasoline...

new game's picture

yup, cost per vote waaay to much. 

NoDebt's picture

Since when has cost entered the equation in any government program?

BarkingCat's picture

cary what? The IOWA caucuses are over... Now maybe a lightbulb will go off in some dimwitted politicians head that we shouldn't ougghta be burning our POISON to make gasoline...

 

 

FIFY

knukles's picture

Verily, Verily I say unto thee, tis' all part of the Great Game.  If indeed one of the Gulf Nations' or other Great Producers is to drive the marginal US shaleies out of business, once that capacity has been taken off line and excess inventories depleted, then Pricing At The Margin is 100% Controlled.  Meaning prices similar to the 70's embargoes or more, say for shits and grins, $150 to $200 is a lock cinch, in the cards, done deal.
At some point (I know not when and now is the land of falling knives) oil and companies therein is gonna be one of the Best Buys of the Century.
People will become fabulously wealthy.
All Geo-Politics
Every Last Drop

Jethro's picture

It'll be catching falling knives for the dudes that think they are calling the shots now too.

Wahooo's picture

A life of bubbles, never ends.

Farqued Up's picture

The big boys will buy out the companies. Snowdyke already instructed not to bankrupt them but force sales of assets. The big boys always promote from within thus become incestuous morons and cannot adequately replace their reserves. They have to buy out the entrepreneurs, and with the collusion of Uncle Sammy the Robber, the banks, and their Saudi be-header blow buddies it will happen at pennies on the $.

Once accomplished, the paper oil traders will trip out the price at $150/bbl.

This world needs about 100 immediate funerals.

Jethro's picture

It's like watching a slow motion train wreck. I've been telling my friends here at home for the past 4 or so years to figure out what they are going to do on the gray/black market to provide a living for themselves. I expect that as the economy tanks, the govt will hike the shit out of taxes, and subsequently create a nation of tax cheats.

Baldrick's picture

ya really want to get scared, check out the proximity of those earthquakes to Cushing.

Jethro's picture

Meh....just more natural disaster stuff. We just kind of roll with that type of stuff here.

two hoots's picture

Even refiners are stretching capacity of refined stuff. Linn Energy (-65% today) may file for bankruptcy.   As long as they could pump they could survive but now, no where to put it.

Gonna have to leave it in the ground.   Opportunity for a spill/contamination/eco problem is very high. 

Wahooo's picture

Those fuckers at Linn should be prosecuted. Didn't they do a huge equity deal last year at $11 a share or so? They are now in hospice.

Jethro's picture

I'll be out there next week, working on a site.

I can't remember which little town it was, but when I started here about 12 years ago, somebody emptied a couple of smaller oil storage tanks and found a couple of bodies. They were in there for years apparently.

knukles's picture

What a great place to stash some corpses.  Damn!  Sure that wasn't on the Whitewater properties in Arkancide?

Jethro's picture

No Clintons around these parts for miles....

Gohigher's picture

Really ?  How can you be so sure with Slick Willie and Benghazi /Whitewater Bitch ?

Chuckster's picture

I guess the bottom line is when producers have to pump...they have to pump.  Kind of like diarrhea.

henry chucho's picture

Frack the shit out of the ground for $70 a barrel,sell it for $30 a barrel,and make the monthly interest payments on your 5% bank loan.Who gives a shit if you have to pay another $10 dollars a barrel a month to store the crap,your never going to pay off any of the principal anyway..

BigRedRider's picture

"The First Warning Sign That Cushing May Be About To Overflow"
ZH is now warning that there's no place left to put the oil.

Just this morning ZH said oil prices jumped because a couple Texas Wieners shut down a few oil rigs:

"Oil Jumps As US Rig Count Plunges Most Since April"
http://www.zerohedge.com/news/2016-02-05/oil-jumps-us-rig-count-plunges-...

So what's the story, Jerry?  Is the price of oil really going up because of lower rig count or is the price of oil going down because Cushing has no place to put the glut of oil?

I GOTTA KNOW!!!!

Clycntct's picture

This is a coin see, now call in hilldebest and get her to call a couple of flips and you can have it any way you want it.

Gregory Poonsores's picture

There's still 100 million barrels of space left in the gulf coast and cushing. I don't think it's as desperate as this makes it out.

Exit through the gift store's picture

quick build a huge pipeline!!! you can store lots of oil in one of those pipes.

jubber's picture

why don't they stop importing? or that just too stupid a question?