April 27, 2020 [Financial Times – Published on April 24, 2020] – Dramatic crude plunge this week put the humble storage hub in the spotlight. Cushing, Oklahoma, population 7,800, has a steakhouse, a burrito restaurant and a KFC. It also has America’s most important complex of oil storage tanks.

 
The prospect that those monumental tanks might soon be full to the brim rocked global markets this week. The US benchmark oil price plunged below $0 for the first time in history, sparking debate and recriminations across the industry that put the humble city in the spotlight. 

The terminals of Cushing are the delivery point for West Texas Intermediate crude oil futures, the most active commodity derivatives in financial markets, and therefore the benchmark that informs traders from Houston to Shanghai.

“It’s sort of the Mecca of crude oil on this side of the world,” said Thomas Ramsey, chief executive of Houston-based oil infrastructure company ARX Energy, who at a previous company oversaw a tank construction project at Cushing.

Companies such as Plains All American Pipeline, Enbridge and Magellan Midstream Partners have invested heavily to add tanks on the north and south ends of town. Working storage capacity has increased by more than half in the past decade to 76m barrels, according to the Energy Information Administration. The added space has accommodated surging volumes of oil pouring in from shale formations and Canada. 

But demand for crude has now dried up in the face of coronavirus lockdowns, with refiners taking just 12.5m barrels a day last week, a quarter less than a year ago. Oil production cuts are only beginning to take hold in response to low prices. 

As a result, crude stocks at Cushing climbed to 60m barrels last week, EIA reported. Analysts believe it, and many other tank farms, will be full within three or four weeks.

“Concerns about bumping into capacity constraints came up before, but never so visibly and never so concretely,” said Antoine Halff, chief analyst at Kayrros, which uses satellite images to measure oil storage levels at Cushing and elsewhere. 

The relentless inflows to Cushing led to an astonishing, through-the-looking-glass moment in the WTI oil futures market on Monday. After teetering around $10 a barrel, prices for delivery next month were suddenly worth less than nothing. At the end of the day they were worth minus $37.63 a barrel. 

Negative commodity prices are common in electricity futures markets, where there is little ability to bank a surplus. Their arrival in oil markets reflected the sudden scarcity of storage, which forced futures traders unable to take delivery to get out at any cost.

More than 2.4m barrels of crude is now set to be delivered to Cushing next month in fulfilment of WTI contracts, exchange operator CME Group disclosed on Wednesday.

Yet most of the remaining room at Cushing is either leased or needs to be kept open to maintain operations, the consultancy Rystad Energy said. Cushing is connected by more than a dozen pipelines in and out, but options to send oil elsewhere are limited.

These explanations for the negative prices were not good enough for Harold Hamm, a veteran Oklahoma oilman, close associate of President Donald Trump and executive chairman of Continental Resources, a shale oil driller. Mr Hamm sought an investigation into possible market manipulation or computer problems at CME. The “system failed, negatively impacting a significant part of the American economy,” he wrote in a letter to the Commodity Futures Trading Commission. 

Chicago-based CME rebutted him, saying prices reflected the severe impacts of coronavirus including lower oil demand, an oversupplied market and high levels of oil in US storage. “The futures market worked to perfection,” Terry Duffy, CME’s chief executive, told CNBC.

Mr Duffy’s market has tended to shape the built environment at Cushing. When spot prices are below futures prices, it triggers demand for storage and spurts of new tank building, as happened five years ago. When spot prices rise the tanks drain and welding contractors look for new work. 

But building capacity takes time, and the constraints at Cushing can be expected to keep reverberating through markets for the time being — in oil futures and in physical storage prices.

Energy logistics company Blueknight Energy Partners told investors in late March that it had fully leased its 34 storage tanks in the city at double its prior rates. Its biggest customer is Vitol, the world’s largest independent oil trading house, according to a securities filing. 

As many oil investors and producers nurse losses from the plunge in prices, the “one area within the supply chain that benefits . . . is the crude oil storage market,” Blueknight chief executive Mark Hurley said. 

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