Robert Campbell at Reuters reports that inventories of crude oil at Cushing, Okla., the delivery point for West Texas Intermediate crude oil futures, are almost certain to set a new record high within weeks before trending lower in the summer. But the key question is how fast will stocks fall? In spite of fears last summer that stocks might continue to mount at Cushing, the North American oil market engineered a big draw down in supplies. A repeat of this trick looks harder this year. Even with the Seaway pipeline due to start around June 1, Cushing is likely to have a big stock overhang through the summer.
This situation may well come even as the rest of the oil market scrambles to build stocks amid mounting geopolitical fears. Indeed Cushing illustrates all too well the fact that proximity to demand is as important as the size of stockpiles if they are to have much influence over global oil prices. To get an idea of how things might play out at Cushing this summer, a look back at 2011 is warranted. Last year Cushing stocks rose from 34.5 million barrels at the end of 2010 to peak just shy of 42 million barrels by mid-April, growing at an average pace of 267,000 barrels a week over 14 weeks. Stocks then fell from through the end of the year at an average pace of 332,000 barrels a week. The decline was more pronounced in the mid-April to end-of-August period, when Cushing stocks fell on average by 441,000 barrels a week.
Now things look more challenging. Over the first nine weeks of 2012 weekly Cushing stocks have risen on average by 1.479 million barrels. This huge build has come despite Midwestern (PADD 2) refineries processing more oil this year. From January to mid-April 2011, PADD 2 refineries processed an average of 3.271 million barrels per day of crude. So far in 2012 runs have averaged 3.466 million bpd. A direct comparison with the first nine weeks of 2011 is a bit more favorable, but even so runs are nearly 150,000 bpd (or 1 million barrels a week) higher in 2012 than in 2011.
In other words, Cushing stocks have risen at a pace five times faster than last year even as regional refineries have processed significantly more crude oil. Considering that last summer's drawdown at Cushing came as PADD 2 refinery runs averaged just over 3.5 million bpd for much of the second half of the year refineries alone will not be enough to replicate last year's performance. Indeed, it even suggests that in the absence of the Seaway pipeline, Cushing stocks may well have continued to build this year. And if that is the case, the initial impact of the Seaway reversal on Cushing stocks may be limited.
Yet the situation at Cushing might not be as dire as the foregoing analysis suggests. For instance Cushing stocks are rising rapidly as a percentage of overall PADD 2 crude oil inventories while overall stock levels lag 2011. In fact a closer look at the behavior of PADD 2 stocks shows a strange dynamic. Huge builds at Cushing are outweighing large declines elsewhere in the region.