Summary
The NYMEX crude oil futures market is encouraging all those with storage facilities at Cushing OK to fill them. By the end of January this storage will be full. Crude oil can be deliverred from many different sources. The next question is its disposal.
Analysis
When crude oil made its first run up to $60 back in 2006 a significant contango developed back then precipitating a tank building boom. This construction was in some cases back by long term leases. Enbridge, SemGroup, Plains and Teppco all increased tankage availability over the last three years. I estimate that a total of over 47 million barrels of storage is available today, with another 3 million coming on line in the next few months.
The industry can NOT fill it to the very top, there are safe working inventory levels to be maintained as well as operational levels to have enough room to accept and deliver the crude oil volumes.
How much can be delivered: A common misperception is that only West Texas Intermediate can only be delivered. That is not the case. The NYMEX rules provides several choices:
Option Number 1: Deliver specific light sweet crude oil: West Texas Intermediate, Scurry Snyder Mix, New Mexico Sweet, North Texas Sweet, Oklahoma Sweet and South Texas Sweet are all allowed. Most people think that about 300-400,000 barrels per day of this is available for delivery, but of course not all of it will go to Cushing as some midcontinent refiners will use it.
Option Number 2: This is an option that is overlooked and has a big impact. TEPPCO and Equilon have what are known as Common Domestic Sweet Streams. These streams must meet a certain quality. This means that if you have a crude production location other than the six mentioned above, it is deliverable to the NYMEX as long as it meets these certain specifications. These specifications are laid out in the NYMEX rule book. It is unclear how much volume could be delivered under this clause, I suspect it could be substantial.
Option Number 3: Deliver any one of the following foreign crudes: Cusiana from Colombia, Brent Blend from the UK, Bonny Light or Qua Iboe from Nigeria and Oseberg Blend from Norway. Cusiana might be delivered, it is unlikely the others will be because Brent is trading at a large premium to WTI.
So as long as the contango exists, Cushing crude oil inventory will fill and stay full. As Jan/Feb expired at around $7 contango, storage at Cushing will fill up by the end of January. The current market structure will perpetuate this storage play at least through the end of May.
In order for inventories to draw, WTI prices must get depressed relative to other crudes to cause their displacement. This will occur and result in lesser volumes of crude originating at the US Gulf Coast for shipment into the midwest. Other midwest crudes will bypass the Cushing OK hub and pump directly to refiners in Illinois/Indiana and Ohio. Increasing product prices relative to crude will provide the incentive for mid continent refiners to increase runs.
These changes, of course will take several months to occur and begin once the NYMEX price structure changes so that it is no longer economical to store crude oil.
