What do you consider the most important US crude oil storage site?
Chances are the site is located on the Gulf Coast, the beating heart of the US oil industry.
The Gulf Coast contains more than half of the country’s refining capacity, making it a huge demand center. The region is also the outlet for US crude exports.
Much of the supply now comes from the Permian Basin in West Texas and New Mexico, the biggest driver of US production growth.
Supply from these oil fields also heads to Midwest refineries after first passing through Cushing, Oklahoma, a major trading hub.
With this in mind, Ursa recently expanded the number of US sites where we measure the amount of crude in storage every week, using radar satellite imagery.
This is part of our global crude monitoring product. New sites outside the US will be added in the weeks and months ahead. We’ll discuss those in future blogs (stay tuned).
As for the US, the list below shows our 16 new sites representing a total capacity of 83 million barrels.
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Belle Chasse, Louisiana
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Colorado City, Texas
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East Chicago, Illinois
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El Dorado, Arkansas
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Hartford, Illinois
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Ingleside, Texas
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Joliet, Illinois
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Lemont, Illinois
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Memphis, Tennessee
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Pascagoula, Mississippi
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St. Paul, Minnesota
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Superior, Wisconsin
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Three Rivers, Texas
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Toledo, Ohio
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Wink, Texas
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Wynnewood, Oklahoma
This is on top of 15 US sites totaling 481 million barrels of capacity we were already covering.
The US’s importance to the global oil market was on display during last week’s meeting in Vienna between OPEC and its allies.
The group, which includes Saudi Arabia and Russia, decided to deepen supply cuts by more than the market anticipated.
A week later, Brent crude futures were above $64 a barrel a week later, a $4/b increase compared with before the meeting.
At the press conference, however, one question was asked that captured the challenge this group of producers faces.
“Are you concerned that this continued output restriction of OPEC+ will continue to allow US shale to gain market share?”
Roger Diwan of IHS Markit directed this question to the Russian energy minister Alexander Novak.
The dynamic between OPEC/Russia and the US is arguably the most important story since the explosion of shale production sank oil prices in 2014.
Fast-forward five years, and the same thing can be said: OPEC is grappling with US oil production growth led by the Permian Basin.
According to US Energy Information Administration (EIA) monthly statistics, US crude production averaged 12.88 million barrels per day (bpd) in November 2019, a record amount.
Source: EIA
However, EIA forecasts US production to increase next year by a slim 2.3%, on top of 7.9% growth this year.
Oil companies are spending less money on drilling. Combined with the natural decline of existing fields, the rate of growth is slowing to a trickle.
This comes as more pipeline capacity will be available to deliver oil from the Permian Basin.
Three major pipelines came online in 2019 — Gray Oak, EPIC and Cactus 2 — representing almost 2 million barrels of takeaway capacity.
Permian pipeline capacity should be even larger next year, with the start of the Red Oak pipeline and the Midland-to-Echo expansion, to name a few.
It’s a remarkable turnaround from a few years ago when the lack of Permian pipeline takeaway capacity caused WTI Midland crude to trade almost $20/b below WTI Cushing in the summer of 2018.
Source: CME Group, Argus via MarketView
This switch from pipeline scarcity to abundance has strengthened the WTI Midland differential.
WTI Midland has traded above WTI Cushing since September, or roughly at parity when you include transportation costs.
Where is all this extra oil going? Mostly overseas. US exports have increased to more than 3 million bpd, according to EIA (See graph above).
That trend looks set to continue. New shipping rules, called IMO 2020, starting next year will require vessels to use low sulfur fuels.
Those regulations favor US shale, a light crude that burns more cleanly than heavy crude.
Companies are investing heavily in dock capacity. Big projects include the MODA Ingleside Energy Center and South Texas Gateway Terminal.
The race is on to build deepwater ports on the Gulf Coast capable of fully loading crude onto Very Large Crude Carriers (VLCC). That’s about 2 million barrels per VLCC.
The only place capable of doing so currently is the Louisiana Offshore Oil Port (LOOP).
There are at least nine projects in the planning phase.
The list of rivals includes Phillips 66, Trafigura, Sentinel Midstream LLC, and a joint venture by Enterprise Products Partners & Enbridge.
Who will make it to the finish line first?
It’s easy to imagine a situation where strong exports + refinery activity + shale production slowdown result in large inventory draws next year.
Will that happen? If so, how low? Where? And when?
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