Increase In US Exports Rendering Once Crucial Cushing Data Irrelevant

Houston is quickly becoming the new benchmark for oil, while Cushing is losing its relevance to the industry.

Cushing wasn't just relevant to the industry for storage purposes, but also for sector wide data purposes. According to Reuters, it "got its distinction in the early 1920s when tanks sprung up to store oil en route from Oklahoma and Texas to major metropolitan areas and refineries in the Midwest. In 1983, it became the delivery point for the newly-launched WTI futures contract CLc1."

For years, Cushing oil inventories were a staple for any business, trader or entity that dealt in the commodity, not to mention those who actively traded it on a daily basis. Cushing inventories were once the key indicator the the supply of crude oil held in the United States. These are the Cushing storage tanks in Cushing, OK:

(Photo: Reuters)

Decades ago, Cushing was seen as a fairly easy way to measure oil supply because the United States was not exporting any oil, but rather only importing it. This made it a novel and effective idea to have one major storage point to reference when trying to help gauge the amount of supply the United States had, which could quickly be used by traders and those in the industry to help with price discovery on oil futures contracts.

Just as the trading market for oil futures has evolved, replacing open outcry with computers, so has the efficiency and method with which we collect oil inventory data. Cushing seems to be “slowly going the way of the buffalo“ while focus turns further south. Reuters reported about Cushing's storage this morning:

But those tanks could soon drain to levels near effectively empty, even as U.S. oil production soars past a new record of 10.4 million barrels per day.

Oil supplies have fallen before in Cushing for a variety of seasonal or market-driven reasons. But this time, there is no shortage of crude in the market. In fact, U.S. production is straining pipeline and storage capacity.

The declining volumes stored at Cushing reflects a more permanent shift, underscoring the hub’s waning influence as the primary measuring stick for the U.S. oil market and the leading barometer of future supply, demand and prices.

Things have changed in the industry over the years. Nowadays are oil exports play as big of a role as our imports and, with that, our infrastructure needs have vastly shifted.

The most obvious change in our infrastructure needs naturally and organically pushes focus toward port cities like Houston to be better indicators of oil activity coming both in and out of the United States. To arrive at spot prices, traders need to have a full grasp on what is now a much more dynamic oil inventory situation that it was decades ago. For this purpose, Houston is now the area most traders are focusing on and want to replace Cushing as a gauge for the oil market in the United States. The article continues:

Instead, producers are increasingly shipping directly to seaports such as Houston, where vessels carry the oil to dozens of countries worldwide. That reflects a major transformation in global crude flows since the United States lifted a four-decade ban on oil exports in late 2015. Some traders and buyers argue the benchmark needs to change to reflect this.

Joshua Wade, a crude oil marketer in Oklahoma, sees the benchmark delivery point moving south before long.

“That’s the direction it’s moving,” he said. “As opposed to importing, now you’re exporting through the same infrastructure ... The oil capital of the nation is in Houston.”

Although it ends decades of focus on the Cushing area for the oil industry, this move toward establishing a new focus on Houston is commensurate with an oil market that has changed significantly over the last several decades. In addition, new pipelines are being built and are expected to come online over the next 2 years, as the country's oil infrastructure continues to evolve to meet the needs of both importing and exporting. 

Cushing's future may not be completely bust, however - it could simply wind up as off-shore gulf storage, or a to act as a back up, rather than a primary storage site:

A spokesman for Magellan Midstream Partners, which owns about 12 million barrels of Cushing storage, said it will remain important because of its connections to the Gulf and Midwest.

Cushing is also connected via pipeline to the Gulf, 500 miles to the south, and can offer cheaper storage than what’s available on the coast, said SemGroup’s Conner.

“I believe Cushing’s next chapter,” he said, “is that it’s going to become an offsite Gulf Coast storage center.”

But Cushing's relevance seems to be on the way out, as least as a crucial data point for the industry. Just as markets "evolve", so do their data points and methods for collecting crucial sector wide data. Now, if we could only get the Fed to do the same with the way it measures CPI.