Why Cushing inventories could strongly support crude oil prices
A must-read analysis of recent WTI-Brent oil spread trends (Part 6 of 8)
Cushing inventories
Crude stocks at Cushing, Oklahoma, decreased by 1.58 MMbbls (million barrels) to 18.9 MMbbls in the week ended October 3. Cushing, Oklahoma is an important hub where West Texas Intermediate (or WTI) crude oil is priced.
After increasing in the previous weeks—see the graph above—Cushing inventories saw a significant drop last week. Refineries returning from unplanned maintenance is likely the reason for this change. See Part 4 of this series for more information.
Given that U.S. oil stocks significantly rose last week, the fact that Cushing inventories saw a significant drop in inventories might offer some support to oil prices. We’ll cover this possibility in the next part of this series.
Long-term declining trend at Cushing
Cushing inventories had been declining for much of the year—see the graph above—thanks to new infrastructure that came online and enabled increased movement of Cushing crude. This infrastructure includes TransCanada’s (TRP) Keystone XL Pipeline , Enterprise Product Partners’ (EPD) and Enbridge’s (ENB) joint venture Seaway pipeline, and Magellan Midstream Partners’ (MMP) Longhorn pipeline as well as the Cushing Marketlink pipeline. As a result of these pipelines, flows from Cushing to the Gulf Coast are no longer constrained.
Plus, sustained high crude oil runs at refineries in the Midwest and the Gulf Coast, which are receiving supplies from Cushing, have also resulted in a decline in Cushing supplies.
Will the declining trend continue?
As new pipelines come online to bring more crude from Canada and North Dakota (the Bakken) to Cushing, the downward trend may not persist.
The Pony Express, operated by Tallgrass Energy Partners (TEP), connects Guernsey, Wyoming, with Cushing. It’s expected to start shipping in October.
Enbridge’s (ENB) Flanagan South pipeline project, which will run through Illinois to Cushing, is also expected to come online in 3Q 2014.
As these pipelines come online and start bringing crude oil to Cushing, inventories will likely stabilize. And as more pipelines come online, inventories may even start rising again.
Midstream companies play an important role
The midstream sector plays an important role in laying out infrastructure based on which crude inventories move.
Some of the midstream companies mentioned above are components of the Alerian MLP ETF (AMLP), while ENB is a component of the Alerian Energy Infrastructure ETF (ENFR).
Seasonal maintenance might cause inventories to increase
Crude inventories are likely to increase in the coming few months as refineries enter into seasonal maintenance and rising output from shale formations continues.
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