AEGIS View: Regional prices suggest oil may want to relocate to Oklahoma’s premier storage hub, from Midland, Houston, Rockies, and the Bakken.
“Enterprise Products Partners said it will give oil companies hunting for places to store crude the chance to ship barrels on its Seaway pipeline from the Gulf Coast to Cushing, Oklahoma... .”Reuters, 4/14/2020
Source article (opens in new tab): Enterprise opens up pipeline freeway to Cushing storage hub for crude producers
- Seaway’s current service takes crude oil south from Cushing, but Enterprise wants to offer northbound service from the Gulf Coast to the Cushing storage hub
- rapidly falling demand has the market looking for more connections to storage facilities
- According to regulatory filings, Enterprise plans to offer a $3/Bbl walk-up rate
There is a market need to store excess crude oil, as recent demand losses are leaving several million barrels of oil each day with no choice but to go to storage. Regional prices are showing a preference for sending oil to the very large Cushing storage hub. Enterprise’s proposed action would ease the flow of oil north from the Houston area to Cushing so that excess supply could be stored there. However, current oversupply means Cushing is not a long-term solution. Either demand needs to come back soon, or supply likely must be reduced.
Refinery consumption of crude oil is about 3 MMBbl/d lower than it would be without Covid-19’s demand losses, and crude-oil exports are down by another 1 MMBbl/d. The combined loss of demand in the U.S. has meant that excess supply is now looking for an alternative. But there are only two choices: Either slow down production, or put the oil in storage.
And that’s the root of Enterprise’s proposal. Already, regional prices are implying that the U.S. Gulf Coast markets are turning away barrels. But with a well-connected, efficient storage hub in Cushing, OK, more barrels could be stored there.
The chart to the left shows the regional price differentials for the May swap contracts, along three corridors: Midland to Cushing; Midland to Houston, and; Cushing to Houston. The Cushing-Houston spread was $1.51/Bbl in favor of Cushing on Wednesday this week, implying that in May, there is incentive for oil to flow north. A marketer could “buy low” in Houston, and “sell high” in Cushing.
This is a reversal of regional economics present in the last 10 years, as Cushing was consistently priced under Gulf Coast markets. Oil wanted to flow south to the large refining center across the Texas and Louisiana coasts.
In our view, Enterprise is responding to market forces by proposing to move oil north on the Seaway pipeline. However, it is likely a short-term phenomenon. When oil demand returns – and we admit the timing is unknowable – Cushing is likely to be a source of daily supply as oil is withdrawn from storage. If that happens, Cushing is likely to be at a discount to Houston-area prices once again, and the market will once again encourage southbound flow.
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