Schork Oil Outlook: Capacity Is A Hotly Contested Debate

As is often the case at this time of the year, fog disrupts vessel traffic in GoM shipping lanes. Traffic through the Houston Ship Channel was suspended for a 27-hour period ended last Wednesday, December 09^th. Twenty vessels (not all of them tankers) were reportedly delayed as a result. The event will undoubtedly add another layer of unpredictability to a weekly inventory report that is unpredictable to begin with.

Per last week’s report, imports into the GoM (PADD III) dropped 18% to a 64-week (post Hurricane Gustav/Ike) low of 4.16 MMbbl/d. In turn, crude oil stocks plunged. Traffic was again delayed this week because of fog.

Over the last four DOE reports we have seen a significant re-steepening of the NYMEX curve. In turn, we have seen a veritable wave of crude oil flood into the NYMEX Hub in PADD II. Supplies in the Cushing, OK complex have surged by 30% since the beginning of November, towards historical highs; 33.4 MMbbls as of last week. Storage at Cushing peaked in early February at 34.9 MMbbls.

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Capacity at the NYMEX Hub is a hotly contested debate. Responding last January to criticism of the NYMEX WTI contract as a global benchmark, Bob Levin, managing director of energy and metals at NYMEX, was quoted saying the Cushing complex has 47.5 MMbbls of storage capacity. Here at The Schork Reportwe assume that is total capacity. We also assume operational capacity is probably around 10 percent below the total or somewhere in the vicinity of 42 MMbbls.

Therefore, there is still around 20% of capacity remaining at Cushing… based on the assumption capacity is actually 47.5 MMbbls. However, there are a lot of skeptics out there who think total capacity is closer to 40 MMbbls. If that is the case then operable capacity could be as low as 36 MMbbls. That would mean there is only around 2½ MMbbls (7½%) of capacity remaining.

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Either way, there is still room at Cushing.

Given the carry on the NYMEX curve along with the penchant to minimize December PADD III crude oil stocks, analysts at The Schork Reportexpect the market to certainly test the peak we saw in February and press towards capacity, be that 36 MMbbls or 40 MMbbls.

In the meantime, the glut at PADD II is undoubtedly adding pressure to the relationship between Brent and WTI thereby once again fueling criticism of the status of the NYMEX contract as a benchmark. As such, the January Brent contract is poised to expire today near a record premium to WTI, $1.36 a barrel per last night’s settle.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.