Crude-oil inventories in Cushing, Okla., the delivery point for West Texas Intermediate (WTI), have tumbled by 44 percent from year-ago levels.
With the start-up of TransCanada Corp’s (TSX: TRP, NYSE: TRP) Cushing Marketlink pipeline at the end of January, southbound pipeline capacity from the biggest oil trading hub in the US has exceeded incoming supplies for the first time.
A domestic crude-oil market in backwardation–a situation that occurs when volumes for sale today fetch a higher price than in the futures market–has also prompted traders to liquidate their positions, reducing demand for storage.
Where has the crude oil draining from Cushing’s storage terminals headed?
Rising inventories of crude oil in Petroleum Administration for Defense (PADD) 3–Alabama, Arkansas, Louisiana, Mississippi, New Mexico and Texas–suggests that the oversupply of light-sweet crude oil that had been bottlenecked in Cushing has migrated to the Gulf Coast.
Over the past year, oil inventories in PADD 3 have increased by 6.8 percent, or about 12.6 million barrels (almost 22 million have left Cushing).
This outward flow of crude oil from Cushing has sparked a rally in WTI prices, reducing the differential with Brent and Light Louisiana Sweet (LLS) crude oil, which, up until fall 2013, had tracked international prices closely.
These shifting movements of crude oil and building inventories on the Gulf Coast should continue in coming quarters, increasing the risk of a downdraft in LLS prices during periods of pipeline outages or refinery turnarounds.
These developments bode well for our favorite refiner, which owns significant capacity on the Gulf Coast.
Master limited partnerships that own strategically located terminal and storage facilities in the Gulf Coast also stand to benefit from an upsurge in demand and higher rates on renewing contracts.
Elliott and Roger on Oct. 30, 2017
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