EIA Report
The weekly EIA report came out today and one of the
noteworthy data points was the Cushing, Oklahoma storage numbers. Already at a
record, Cushing added another 1.8 million barrels to storage sending total
Cushing stocks to 51.9 million barrels of oil in storage facilities at the
energy hub.
The Seaway pipeline was recently expanded to 400,000 barrels
per day from 100,000 barrels per day, and many analysts have predicted that
this would solve the Cushing oil glut. But it is looking more and more that
what the Seaway pipeline offers is a cheaper mode of delivery out of Cushing,
and the real benefit is one of logistical optionality for transportation.
Further Reading - Keystone XL Pipeline: Economics, Idealism and Politics
However, it is shaping up due to the sheer size of these build in inventories at Cushing that the Seaway pipeline is not a magic solution for the supply and demand fundamentals at play in the oil industry in the United States, there is just more US production, than there is US infrastructure in place to deal with the trending upturn in this production.
Oil is Fungible
In short, the US and global oil model isn`t set up for the
United States to be producing more than 7 million barrels of oil per day. Even
if the Seaway pipeline could send 4 million barrels of oil out of Cushing, it
wouldn`t make a difference because Oil is fungible, so without major cuts
somewhere else in the global supply chain, then you’re going to have supply and storage builds somewhere in the supply chain.
Saudi Arabia can only cut back
production so much
The Saudi`s have already cut back production to fifteen
month lows, how long is that going to continue as they need oil revenue just
like everyone else? So Cushing is just a reflection and end point for the
delivery of increasing US production, which ultimately is building more than
there is demand from refiners for producing products, even with an increase in
exporting of gasoline and other petroleum products.
Cushing never was landlocked
This should have been apparent to analysts as rail has been
delivering Oil to refiners during this domestic boom, and so are barges taking
oil out of Cushing, so large amounts of oil are getting to refiners. Some of it
before it even gets to Cushing, and some after with the Seaway pipeline, and
barges out of Cushing; and with the spread in 2012 of as much as 25 dollars,
there were major incentives to get US oil to refiners in a myriad of ways.
Cushing builds reflective of bigger
problem
Yet we have almost doubled Cushing`s inventories in a year.
This points to a much bigger problem with analysts missing entirely, thinking
this was just a Cushing log jam problem. This is seeing the trees, and missing
the overall forest, Cushing is just a reflection of the bigger problem, there
is just too damn much oil sloshing around the world right now with nowhere to
go.
You see this in stories about Nigerian crude for February
delivery being unsold and stuck on cargo ships because there are no buyers with
the increase in US domestic production. Iraq is producing more oil, and they
need the revenue so expect more oil coming out of Iraq for the next decade with
each year producing more than the previous.
The world is producing more oil than
is consumed each day
The world global supply chain is producing more oil than the
world needs every day, and this means storage has to build somewhere, and
whether it is Cushing, or Nigeria, or China it has to be stored somewhere.
In the US, Cushing has expanded storage facilities the past
couple of years, and has been a default place to send the extra oil. But even
Cushing is rapidly reaching capacity limits, and even if on the margin the
Seaway pipeline takes out more oil, refiners can only handle so much more
before they become the bottleneck in the equation.
US Refineries not easy to build
Remember, refiners are not easy to build, and the US has
only relatively recently ramped up domestic production, so even with
substantial increases in fuel exports, there just are not enough US refineries
to handle the increase in US oil production. In short, the oil model of the
last decade was not set up with the US being a major producer. The US
production increases is throwing the global supply models a major curve ball.
Therefore, the only way that Cushing inventories are going
to go down substantially is if more US refineries are built, and that could
take three to four years, if they are built at all given the regulatory and
financial hurdles that have prevented progress in this area over the last
decade.
Unintended Consequences
The bottom line is that the Seaway pipeline is no cure for
what ails Cushing inventory builds. For what ails Cushing is the fact that
nobody thought about the unintended consequences of a boom in US oil production
due to high prices for the past decade.
The global economy has slowed down from the peak in 2007,
but prices have remained high, this resulted in increased production projects
globally, and the rise in US production just sent the supply levels over the
edge.
Furthermore, nobody ever planned or expected that the US
would start producing with these numbers ever again. This has thrown the whole
supply chain on its back, Cushing is just a reflection of this fact, there is
more oil than the world needs right now, and the world definitely didn`t need
an increase in US production.
Cushing builds still a problem
As a result you get Cushing, the manifestation of what
happens when the unexpected happens before the oil models know what to do with
the extra supply. You do not get the kind of builds at Cushing, with a new
pipeline in existence for six months, a hefty spread, and rails transporting
oil at unheard of levels, unless there is a much bigger problem than just
increasing the Seaway pipeline by 300,000 barrels per day.
The Seaway Pipeline just steals
business from Railroads & Barges
So Seaway doesn`t solve the Cushing problem as many have
hoped. All Seaway does is maybe take some business from barges and railroads in
the transportation of the product.
But the problem was much bigger than these people ever
realized, because Cushing never represented a landlocked, logistics equation.
Cushing builds represents the fact that right now there is
just too damn much oil that is being produced versus consumption needs for that
oil. So it has to be stored somewhere, and Cushing is one of the places.
Too many chefs in the kitchen
The real problem is that nobody ever planned for the US to
be producing 7 million barrels of oil every day and rising, there is just not
enough demand in the world for this extra oil, so it has to be stored because
everyone needs the money these days. And until prices drop substantially, no
one is going to cut back producing this black gold.
Further Reading - Physical Delivery Needed in Agriculture and Energy Markets
Further Reading - Physical Delivery Needed in Agriculture and Energy Markets
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