The Peaking of Storage

  • 10 Aug 2020
  • By Daniel Brusstar and Elizabeth Hui
  • Topics: Energy

Executive Summary

The crude oil storage levels in the U.S. have peaked and are starting to decline after a rapid rise in April 2020.  The U.S. 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.  As of the end of July 2020, Cushing stocks declined to 51.4 million barrels, or 65% of working storage capacity.

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

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 responded to the volatile market fundamentals to re-direct barrels to flow into storage, due to the declining export arbitrage in the U.S. 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 U.S. 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 re-appear 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 responded 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 541 million barrels in June 2020, representing 62% of the total working storage capacity in the US of 672 million barrels, according to the EIA.  By the end of July 2020, US crude oil inventories declined to 526 million barrels, or 59% of working storage capacity. The chart below shows the rapid rise in U.S. 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 on May 1, 2020, which was 83% of the working storage capacity of 76 million barrels, according to EIA data.  As of the end of July 2020, Cushing stocks declined to 51.4 million barrels, or 65% of working storage capacity.

The peaking of storage led to a flattening of the forward price curve in the NYMEX Light Sweet Crude Oil Futures Contract (also called “WTI futures”) in May 2020 as crude oil production declined and global refinery demand slowly recovered with the re-opening 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 by late May 2020. 

The last period of “super-contango” in WTI futures occurred in early 2009 during the demand destruction after the financial crisis in 2008, 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, 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 LOOP Crude Oil Storage futures contract spiked up to $0.55 per barrel for storage in April 2020, up from just $0.07 per barrel for storage in March.  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 $0.10 per barrel in June 2020.   

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 OPEC+ meetings, 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 U.S. Gulf Coast market.  With the slow 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 the challenge of hedging the price risk that lies ahead in the “new-normal” that will emerge in the global oil market.

About CME Group

As the world's leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. Comprised of four exchanges - CME, CBOT, NYMEX and COMEX - we offer the widest range of global benchmark products across all major asset classes, helping businesses everywhere mitigate the myriad of risks they face in today's uncertain global economy.

Follow us for global economic and financial news.

CME Group on Twitter

CME Group on Facebook

CME Group on LinkedIn