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Cushing, Oklahoma, 70 miles northeast of Oklahoma City, is a sleepy town with a population just under 8,000. It's also the intense focus of every major player in the American oil market right now.
North American crude oil is pouring into Cushing, where dozens of steel storage tanks fan out from the outskirts of town, tank farms that march on for miles and connect to every major oil patch in North America through an maze of pipelines. Cushing's nickname is "The Pipeline Crossroads of the World."
It's one of the largest crude oil storage hubs on Earth, and in the U.S. arguably the most important. Delivery for West Texas Intermediate crude is taken here, priced for Nymex contracts and stored before it's shipped to refineries.
But with WTI prices plunging by half since last summer, more crude has been coming into Cushing since late 2014 than has been flowing out. And storage capacity has been filling up—fast.
In the week ended Feb. 27, U.S. commercial crude inventories climbed by a larger-than-expected 10.3 million barrels, to 444.4 million nationwide, clocking another record high.
Of that, stocks at Cushing rose by roughly 540,000 to 49.2 million barrels, a relatively modest increase compared to recent weeks. Still, that sum is 53 percent higher than year-ago levels, and a mere 2.6 million barrels away from the hub's 2013 all-time high.
"If you look at historically what is available at Cushing and where it could go to, we have never seen utilization over 80 percent," said Brian Busch, director of Oil Markets and Business Development at Genscape, a market data firm.
Genscape keeps its own tabs on storage, using infrared technology to surmise inventories. According to its most recent reading, 63 percent of Cushing's total shell capacity is being utilized. That means that full operating capacity is 15 million to 17 million barrels away.
Prior to the most recent reading, crude inventories at Cushing were building at more than 2 million barrels per week. Based on that rate, Genscape forecast that the hub could essentially max out as soon as mid-April.
Other industry experts have made similar predictions. Last week, for example, during an earnings call, executives at refiner HollyFrontier said storage tanks in Cushing could reach capacity in eight to 10 weeks.
"Once Cushing becomes full, one thing that does happen is ... the barrels that we have seen going into storage since November re-enter the refinery supply market. That's just extra barrels available to the refineries," said Busch. "I would expect that to have a slightly bearish impact on the crude price."
The U.S. oil market is currently in "contango," meaning spot prices are well below WTI futures contracts for the coming months. This condition makes it more profitable for energy companies and traders to buy crude at the current price, store it in tanks and deliver at a later date.
"I'm looking at a forward curve where six to nine months from now ... crude is selling for $7, 8, 9 per barrel more—and it costs me maybe $3 or $4 to store that barrel, so there is a $5 profit to be made if I can secure that barrel today and then find storage," said Wood Mackenzie Integrated Energy Vice President Skip York.
Mike McDonald, co-owner of privately held, Oklahoma City-based Triad Energy, concurred: "You could buy April oil at say, around $50 and sell June oil at $52 and lock in a $2 profit. It's kind of like shooting fish in a barrel. ... It's a no-lose deal, very low risk."
That's encouraged more storage across the United States, but especially in Cushing, which is considered one of the safest places to execute this trade, thanks to the fact that deliveries are taken there and because of the extensive pipeline networks.
More profits, more storage. Pipeline and terminal operator NuStar Energy recently disclosed that nearly 98 percent of its capacity in Cushing is contracted. And although Enbridge Energy Partners, which touts one of the largest terminals in Cushing, won't disclose how much of its tank farm is spoken for, the company does say lease rates are higher than a year ago, thanks to strong demand.
Last Friday, second-month Nymex futures (May) surged to $2.38 more per barrel than front-month delivery futures (April), after an average premium of roughly a dollar for most of February. A number of experts wrote about the blowout in the spread, calling it a "super-contango."
Many have taken it as a warning that Cushing is running out of room.
"The signal being sent to the market is that storage is running out, and to stop sending barrels to Cushing," Energy Aspects wrote in a recent note.
And Cushing isn't the only location to watch.
Wood MacKenzie's York noted that the Gulf Coast will become increasingly important, especially if record inventories continue.
"It's a question whether Cushing plus the U.S. Gulf Coast capacity could fill up, and that would ... set up a very serious price dynamic, some serious volatility introduced to the market," he said.
Crude stored along the U.S. Gulf Coast has also increased, though not nearly as fast as Cushing has, since storage along the coast is more spread out, less interconnected and considered riskier.
Nonetheless, as prized tank real estate in Cushing is snatched up, more crude is flowing south, helping contribute to the 5-million-plus-barrel build reported by the U.S. Energy Information Administration this week.
It's highly unlikely that the Gulf region will fill up, but oil data over the next several weeks will be key. If oil continues to be stockpiled, and storage does actually reach full operating capacity in Cushing, then more oil will be forced onto the market, possibly pushing WTI dramatically lower.
If that happens, more wells will end up capped, and the United States' current 9.3 million-barrel-per-day production boom will finally begin to decline. Even so, it would still take time for the crude socked away in storage tanks to unwind, potentially masking a budding supply crunch.
Then the entire cycle would begin again.
"It generally plays out the same way," said Triad's McDonald, a three-decade industry veteran. "The only issue is the length of the cycle, and that'll be a function of supply and demand."
However long that process takes, in the meantime, just outside the geographical limits of the tiny town of Cushing, some $2.5 billion worth of black gold is sitting in tanks, awaiting delivery and drawing the attention of the entire industry.