With the amount of crude in storage at Cushing, Oklahoma falling to multi-year lows, oil prices should be deep into bull market territory. Right?
Crude futures have been wallowing several dollars off multi-year highs after hitting resistance earlier this summer. Hedge funds have tilted bearish, slashing net length in NYMEX WTI and ICE Brent. The latter contract has been in contango – a telltale sign of ample supply weighing on the prompt contact.
Crude futures have been range-bound the last few weeks, even though inventories at the NYMEX WTI delivery point remain low.
On August 4, Ursa measured Cushing stocks at 22.6 million barrels (26.3% of capacity). The next week saw inventories rise to 24.8 million barrels. That was still down from more than 40 million barrels seen May 18.
What’s been behind the draws?
For starters, traders have no financial incentive to park barrels there. NYMEX WTI’s structure is still in backwardation.
Supply from the Permian Basin that might head to Cushing – if contango existed – has likely been redirected to go straight to the Gulf Coast.
Another reason for reduced inflow has been the disruption of Syncrude production in Alberta since the summer. Canadian barrels reach Cushing via the Keystone Pipeline.
Source: Energy Information Administration (EIA) for pipeline data
Image Credit: Lauren Baker, Liam Cullen/Ursa
As far as outflows, supply has been delivered from Cushing toward the Gulf Coast for exports, which have been elevated over the last year.
Another factor has been unusually strong refinery activity.
Gulf Coast refiners processed an average of 9.649 million barrels per day the week ending August 10, a record amount, according to the US Energy Information Administration data going back to 1992.
USGC refinery utilization equaled 99.7% of capacity. Refiners in the Midwest, which also source crude from Cushing, have been running equally hard. Midwest refinery utilization has averaged 99.2% over the four weeks ending August 17.
Healthy refining margins have served as an incentive. Softer crude prices, along with robust gasoline demand thanks to a solid economy, have aided the bottom line.
What’s the problem then?
Partly the timing. There is the potential for refiners to swamp the market with products late in the summer when peak driving season is almost over.
A glut of gasoline could weaken refining margins just as autumn maintenance gets underway. The result? Repairs could be extensive and last longer than usual if refiners feel no rush to return.
Less refinery activity means less crude demand. That could eventually pull prices lower.
The outlook for US crude exports faces its own set of obstacles. The coordinated output cut by OPEC and Russia has been relaxed setting the stage for a tough fight among producers.
Harder yet, the spigots have been turned on at a dicey time. The brewing US-China trade war and threat of Turkey’s economic crisis spreading across emerging markets have fueled concerns over a global economic slowdown which would likely curb oil demand.
What do you think? Are these fears justified? Or has the market become overly cautious?