April 06, 2020 [Oil & Gas 360 – Published on April 5, 2020] – Phillips 66 Partners LP will offer shippers storage on its Gray Oak crude oil pipeline system in Texas because of an urgent need for tank space, the company said on Friday, as an oil glut in the United States worsens from a sharp falloff in fuel demand.

 
Crude storage space has quickly filled since the coronavirus pandemic has halted movement around the world and sharply decreased fuel demand. At the same time, a price war between Saudi Arabia and Russia has flooded the market with crude and pushed oil prices lower.

“In response to shipper demand, Gray Oak Pipeline is modifying its rules and regulations to accommodate on-system crude storage,” a Phillips 66 spokesman said in a statement. “Current events have significantly impacted demand for West Texas Crude oil, resulting in an urgent need for crude oil storage.”

Gray Oak has up to 1 million barrels of storage capacity available to shippers for WTI and WTL grades of crude oil, the statement said.

The 900,000 barrel per day (bpd) Gray Oak Pipeline is one of the biggest new pipelines shipping from the Permian Basin, the largest U.S. shale basin, to delivery points at or near the Houston Ship Channel.

Flows on the new pipeline are expected to slow greatly as the arbitrage to ship profitably from the Permian to the Gulf Coast has evaporated as prices crashed, traders said.

The on-system storage is being “offered in response to fast-developing market conditions,” Phillips 66 said separately in a filing with the Federal Energy Regulatory Commission, adding it would be effective on April 5.

On-system storage typically refers to ancillary storage at tank farms at a pipeline’s injection or origin points, trade sources said.

WTI Midland crude traded at a midpoint of a $4 a barrel discount to the U.S. benchmark on Friday while WTI at East Houston, or MEH, traded at a midpoint of a 50-cent discount to U.S. crude futures.

The spread between the two grades was not enough to cover most pipeline transportation costs, traders said. Shippers wanting to use the on-system storage on Gray Oak’s system will be required to execute a separate binding agreement for that purpose, according to the filing.

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