The Peaking of Storage

  • 29 May 2020
  • By Daniel Brusstar and Elizabeth Hui
  • Topics: Energy

Executive Summary

The crude oil storage levels in the US have finally peaked and are starting to decline after a rapid rise in April 2020.  The US crude oil stocks recorded a massive monthly build of 48 million barrels in April 2020, according to the Energy Information Administration (EIA).  In Cushing, inventories rose 23 million barrels during the month of April 2020, peaking at 65 million barrels in storage, which was 83% of working capacity, according to EIA data.  For the week ending May 15, 2020, Cushing stocks declined sharply to 56.9 million barrels, or 72% of working storage capacity.

Further, storage rates have risen in Cushing and at the LOOP terminal in Louisiana, as companies rush to take advantage of the storage economics that prevail in the marketplace.  In fact, CME Group’s LOOP Crude Oil Storage futures contract spiked up to $0.55 per barrel for storage in May 2020, up from just $0.07 per barrel for storage in April 2020.  In addition, Cushing storage rates have risen sharply, with tankage reaching $0.50 per barrel in a storage auction hosted by Matrix Markets in March 2020.

In response to the global demand and supply shocks from the Covid-19 pandemic and the recent OPEC+ meetings, the demand destruction and supply glut led to rising inventory levels in March and April 2020.  Consequently, the arbitrage price signals have responded to the volatile market fundamentals to redirect barrels to flow into storage due to the declining export arbitrage in the US Gulf Coast market.  The contango price structure in the NYMEX Light Sweet Crude Oil futures contract pulled barrels to the Cushing hub due to the storage incentives.  In fact, the expanded pipeline infrastructure in the US Gulf Coast and Permian Basin has provided critical optionality to the marketplace, providing an outlet for barrels to flow to Cushing and to other Gulf Coast storage hubs to benefit from the storage economics.  As global oil demand has started to reappear after the pandemic, storage levels have declined as the arbitrage price signals have begun to pull barrels out of storage and direct them to the refining sector and the export market.

The unprecedented global market fundamentals have applied intense stress on the oil industry in the first half of 2020, as companies respond to the volatile arbitrage price signals and hedge the associated price risk.

Storage Overview

The crude oil storage levels in the US rose sharply in April 2020 and peaked at 532 million barrels in inventory, representing 62% of working storage capacity, according to the EIA.   The chart below shows the rapid rise in US crude oil stocks and the recent decline.

Chart 1: Total US Crude Oil Stocks

In Cushing, inventories rose at a record pace of 23 million barrels during the month of April 2020, peaking at 65 million barrels in storage, which was 83% of working capacity, according to EIA data.  For the week ending May 15, 2020, Cushing stocks declined sharply to 56.9 million barrels, or 72% of working storage capacity. 

The peaking of storage levels led to a flattening of the forward price curve in the NYMEX Light Sweet Crude Oil futures contract (also called “WTI futures”) as crude oil production declined and global refinery demand picked up with the reopening of economies after the COVID-19 pandemic.  The market responded quickly to the arbitrage price signals, and consequently, WTI futures moved from a “super-contango” price structure in early April 2020 to a modest contango time-spread structure in late May 2020. 

The last period of “super-contango” occurred in early 2009 during the demand destruction after the Lehman bankruptcy, and again in 2011 when the takeaway pipeline capacity in Cushing was constrained prior to the reversal of the Seaway Pipeline in 2012. 

Chart 2: Cushing Crude Oil Stocks

Further, starting in March 2020, storage rates rose sharply in Cushing and at the LOOP terminal in Louisiana, as companies rushed to take advantage of the storage economics in the marketplace.  In fact, CME Group’s NYMEX LOOP Crude Oil Storage futures contract spiked up to $0.55 per barrel for storage in the May 2020 contract month, up from just $0.07 per barrel for storage in April.  In addition, Cushing storage rates rose sharply, with tankage reaching $0.50 per barrel in a storage auction hosted by Matrix Markets in March 2020.  As crude oil inventories started to decline, the storage rates in the LOOP Crude Oil Storage futures also declined to $0.25 per barrel in the June 2020 contract month.   

Chart 3: LOOP Crude Oil Storage Futures Settlement Prices

Looking Ahead

In response to the extreme demand destruction and supply shocks from the Covid-19 pandemic and the recent OPEC+ meetings in March and April 2020, companies have responded to the arbitrage price signals as they strive to manage the price risk associated with the rising level of crude oil inventories. The volatile price arbitrage pulled barrels into storage at a record pace in April 2020 and the export arbitrage declined in the US Gulf Coast market. With the return of global refining demand, storage levels have peaked and have started to decline as the arbitrage price signals have begun to pull barrels out of storage and re-direct them to the refining sector and the export market. As the market begins to re-balance, companies will face new challenges and will look to hedge the price risk that lies ahead in the “new normal” that will emerge in the global oil market.

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