March 5, 2009 at 1:50 pm #3172
<Storage problems in Cushing is bringing focus on distorting WTI index problems and bringing potential change – see my follow up comments about Platts proposal American Sour index for USGC as alternate – CER>
New storage capacity at the Nymex crude futures delivery point at Cushing in Oklahoma has not kept pace with a stockbuild that is distorting US benchmark WTI.
London, 4 March 2009 (Argus)
Crude stranded at Cushing is straining tank operational capacity limits, dragging down prompt WTI against further forward markets, other US grades and global crude benchmarks. The extensive building of new storage capacity has not matched an increase in crude deliveries – especially from Canada – and persistent bottlenecks to move crude from the midcontinent.
Nymex front-month crude futures have undergone dramatic price dips relative to the second-month contract in the days around contract expiry. The scarcity of tank space in the midcontinent is putting a premium on storage costs, which is reflected in prompt prices falling below those for forward delivery.
A tank-building spree has boosted Cushing’s nameplate storage capacity from about 37mn bl in mid-2007 to an estimated 45.7mn bl now. But it is likely that less than 80pc of the capacity is usable. US pipeline firm Plains, a leading owner of Cushing storage, calculates that in the last major episode of crude backing up at Cushing – in the months after a fire at Valero’s 170,000 b/d McKee refinery in Texas in February 2007 – storage hit capacity at about 78pc of the nameplate figure. That would equate to an operational capacity of 35.6mn bl today. Crude in storage at Cushing was 34.5mn bl – or nearly 97pc of operational capacity – on 20 February, according to EIA data.
Tighter oil storage regulations will force some of the older tanks at Cushing into retirement. But operators such as Plains and Canadian pipeline firm Enbridge have been refurbishing storage facilities as well as building new tanks, and the effect of the new regulations on overall Cushing capacity is likely to be minimal.
Crude is building because there is little capacity to move it out of Cushing. The main routes – the 200,000 b/d Ozark pipeline and the 195,000 b/d Mid-Valley pipeline, which can divert crude from Cushing – are at capacity. BP has its own pipeline to Chicago, which it is using to move cheap Cushing crude to its 410,000 b/d Whiting refinery in Indiana. Midcontinent refiners are also running well below capacity, backing up more crude in the region.
Canadian crude is moving to Cushing in ever greater quantities as pipeline projects – years in the making – come on line. Enbridge still expects to expand its 125,000 b/d Chicago-to-Cushing Spearhead pipeline to around 190,000 b/d early this year. The company has completed the 400,000 b/d Southern Access pipeline, which will boost the flow of Canadian crude to Chicago. The line is being filled with crude now. An additional section linking Southern Access with the expanded Spearhead at Flanagan in Illinois is scheduled to enter service in April.
TransCanada’s 435,000 b/d Keystone pipeline from Hardisty in western Canada to Patoka in Illinois is to begin service before the end of this year. And an extension to Cushing will be in service by the end of 2010. TransCanada has received approval to expand Keystone to 590,000 b/d, a move backed by shipper commitments.
Falling midcontinent crude production was expected to increase regional demand for imports, which were 2.7mn b/d last year. But some of the decline in midcontinent output is being reversed or stemmed by enhanced oil recovery in west Texas and by soaring production from the Bakken Shale oil formation in North Dakota and Montana.
Enbridge rushed to expand its North Dakota pipeline to 110,000 b/d in 2007. The firm is already at work on a further expansion to 161,000 b/d, which is due in service early next year. That crude will flow into the main southbound Enbridge system towards Chicago, with options to continue to Cushing.
Any relief for the system is years away. The Keystone pipeline has shipper commitments for a southbound extension from Cushing to Sunoco’s 17.1mn bl terminal in Nederland, Texas. Refineries on the Gulf coast from western Louisiana to Corpus Christi, Texas, are supplied with crude from Nederland. But the 500,000 b/d Keystone extension is planned as an express pipeline, bypassing Cushing, and may not pull crude directly from the storage hub.
Sunoco says it is exploring several options with other oil firms to bring Canadian crude from Cushing to Nederland. The company owns lines that flow north from the Nederland area to Cushing, and there has been widespread discussion over the possibility of reversing the flow of those lines to bring Cushing crude to the coast.
Another option often discussed is the reversal of the 350,000 b/d Seaway pipeline, jointly owned by ConocoPhillips and midstream company Teppco. Crude in the line runs north from Freeport on the Texas coast to Cushing at present. But midcontinent refiners have supply contracts linked to crude delivered on Seaway. ConocoPhillips itself owns three refineries in the Cushing area. The firm may have little incentive to boost prices in the midcontinent by reversing its own line to pull crude out of Cushing.
March 5, 2009 at 1:52 pm #6203
Here is McGraw/Hill news release about setting a new Sour Marker as alternate to screwed up WTI. After hearing me gripe for years about using sweet WTI/Brent index’s for imported sours – sounds like someone finally got wise! This is something Refiners should really get behind because it will save them lot money in long run & better reflect their actual markets (assuming they do it right). Both Sweet Crude index’s have been way too shallow in both volume & export trade to be a realistic index for decades (actually both have become blends of several sweet crudes just to keep the volume up).
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