Bottom of the barrel

Cushing, Okla. had another fall--fallen just 1.6 million barrels above what some say is its minimum operating capacity. Oil (NYMEX:CLN14) flows down south as well as pipeline issues are creating a possible squeeze play possibility. While overall crude supplies are swelling the emptying of Oklahoma is showing how quickly the dynamics of the US oil industry is changing.

Estimates vary as to what the operational minimum at Cushing, Okla. is but most feel that is around 20 million barrels. Others say it could be as low as 8 million. But according to Reuter's the calculation hangs around two factors -- maintaining a level of oil to keep the tank's floating roof up and having enough flexibility in the tanks to operate them smoothly at an optimal pressure level. Most oil storage tanks have floating roofs that rise and fall with the amount of oil in the tank. The roofs have "feet" which are not supposed to "land" on the tank bottom.

"There's always a portion of the oil that isn't reachable, you'd never pump a tank dry. It varies in terms of the design of the tank but I would say it's about 10 percent," said Mark Shaw, executive director at E3 Consulting LLC, an engineering firm that has reviewed designs of Cushing tanks. A spokesman for Magellan Midstream Partners (MMP.N), the third largest storage operator at Cushing with capacity of 12 million barrels, said its facilities would need up to 10 percent volume of the shell capacity to "maintain normal operations". But, Shaw said operators would usually have another extra few percentage points to maintain a practical level.

So if supply in Cushing continues to drop the possibility that deliverable supply will be tight causing a spike in WTI. Despite the fact that supply in the rest of the country is ample if not overwhelming. The Energy Information Administration reported that U.S. commercial crude oil inventories increased by 1.7 million barrels from the previous week putting them at a whopping 393.0 million barrels well above the normal range. Yet when it comes down to it the NYMEX WTI is based on Cushing and at Cushing it is a different story.

In the Gulf Coast light oil is abundant and the high quality of the crude that is coming from shale is almost too good to be true. The yield from the crude would be even better if we were prepared to refine this fine specimen of nature. WTI once the crown jewel of oil refiners is being displaced with this fine elixir.

Gasoline (NYMEX:RBN14) demand did not disappoint as inventories decreased by 1.8 million barrels last week, and are in the middle of the average range. Demand on the four week average is up an impressive 5.4% as America said get me the heck out of the house! Distillate fuel inventories decreased by 0.2 million barrels last week and are below the lower limit of the average range for this time of year as exports surged and farmers finished planting. Total commercial petroleum inventories overall increased by 3.2 million barrels last week but that will not put an end to speculation of a possible squeeze in Oklahoma.

The other issue for oil is still the Ukraine. Reports that Russian troops are pulling back and pressure from the EU to cut a deal to keep the gas flowing considering that Gazprom is getting the money not from Ukraine but the IMF. Yet if a deal does not get done oil will spike. If they get a deal it will break.

Natural Gas (NYMEX:NGN14) inventories  came in 114 slightly above expectations of 110 but not the type of injection that will inspire confidence in the long run that storage will get refilled to anywhere close to five year average levels. The race to refill goes on and with pipeline capacity.

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