Stocks at the WTI delivery hub at Cushing, OK have been declining at a brisk pace that appears to have accelerated in recent weeks. Cushing crude stocks fell 3.9 million barrels in the week ending Oct 22 with inventories there now below thirty million barrels for the first time since October 2018. In May 2020 Cushing stocks peaked at 65.5 million barrels. Over the most recent four-week period the cumulative decrease at Cushing was 6.6 million barrels.
Cushing has served as the physical delivery point for the CME/NYMEX Light Sweet Crude Oil futures contract (aka WTI) since it was launched almost forty years ago. Storage capacity at Cushing is estimated to be 76.6 million barrels according to the EIA. Industry estimates suggest operational minimums, or “tank bottoms,” are about twenty million barrels, now very proximate.
During the 1980s, 1990s and 2000s Cushing was a key pipeline hub in the northbound flow of Texas, US Gulf Coast and imported crude to the US midcontinent. With the “shale revolution” flows have shifted southward with Cushing now a key crossroads on the path for Canadian, Bakken, Rockies, and midcontinent crude to Gulf Coast refiners, and since 2016, US crude export options.
Note that crude and refined product inventories are lean globally, so Cushing stocks are trending consistent with this persistent macro pattern. However, given its role as the futures delivery point, Cushing stock levels play an outsized role in WTI curve shape and market sentiment. This is increasingly the case when stocks at Cushing near storage capacity on the upside or operation minimums on the downside. If we continue to draw at the pace of the past four weeks, that will put Cushing stocks at operation minimums in just four to five weeks.
The rapid paring of Cushing inventory has led to steep backwardation on the forward WTI curve as well as increased volatility on the prompt WTI roll (Dec/Jan), the Dec 2021 vs Dec 2022 spread (“Dec vs Red Dec”), and the WTI/Brent spread or trans-Atlantic arbitrage. The prompt WTI/Brent spread was as wide as -$4.00 in early Oct but traded inside -$2.00 this week. The Dec versus Red Dec WTI spread spiked to a new contract high of +$12.48 on Monday before consolidating between $10.50 and $11.50.
Expect more “local” fireworks here in the weeks ahead alongside the broader oil market uncertainty around energy/BTU shortages globally. Additional Cushing draws during November now have outsized significance in terms of curve shape/degree of backwardation as well as broader market sentiment.