U.S. Running Out Of Oil Storage? Blame Canada
Oil storage tanks are filling up. There’s a concern, highlighted by this AP story yesterday, that sometime in April U.S. storage could hit “tank tops.” With too much oil and not enough places to put it, the natural market response would be for the price of crude to plummet, maybe even down into the $20 range, deepening the nightmare for America’s frackers and possibly catalyzing a round of defaults and bankruptcies.
At first glance the reasons for the buildup in oil storage seems obvious. America’s oil companies are simply fracking out too much light, sweet crude, right? They are. But that’s not the cause of the glut at the storage hub in Cushing, Okla. A report out this week from the Energy Aspects consultancy explains that the issue is more complicated than that. Blame Canada.
Energy Aspects says that it’s not the American frackers at all. Rather the culprit is barrels of heavy Canadian crude backing up there on their way to Houston.
In November, pipeline company Enbridge started up its $3 billion Flanagan South pipeline. The line originates in Pontiac, Michigan and carries about 550,000 bpd of oil across Illinois, Missouri, Kansas and down to Cushing.
Flanagan South was a watershed project because it accomplishes what Keystone XL was supposed to — creates the first high-volume, direct connection between the heavy oil fields of western Canada and America’s refining megaplex on the Gulf Coast. The only material difference between the two: Keystone would go right over the U.S.-Canada border (and thus require State Dept. approvals), while Flanagan picks up oil that a separate pipeline brings in to Pontiac.
When this heavy oil gets to Cushing, customers paying to send their oil on the line (called “shippers”) have the option of storing it for a time at the hub, or sending it on down to the Gulf via the newly completed Seaway Twin pipeline, owned by Enbridge and Enterprise Products Partners.
If prices were higher for the heavy Canadian crude, those shippers might prefer to send it straight down Seaway. But because of the “contango” situation in the oil markets now — where the price of oil for delivery six months from now is higher than the current spot price — these shippers would rather store it and wait.
Energy Aspects notes that since Flanagan started up in late November it has delivered about 33 million barrels into Cushing, while the Seaway Twin has only taken 15 million of those on down to Houston, leaving 18 million extra parked in Cushing, which has about 75 million barrels of total storage capacity.
In addition to contango incentivizing storage, the heavy Canadian oil is competing with even cheaper heavy and medium grades from Mexico and Brazil, as well as a new slug of medium, sour production out of the deepwater Gulf of Mexico. Why are those crudes cheaper? Because as tight as storage is getting at Cushing, it’s even tighter in the Atlantic basin, with shippers even chartering out supertankers to store their oil on the high seas.
It hasn’t helped matters that Gulf Coast refineries have been hit by unplanned outages such as a labor union strike, which reduced demand. With so much cheap oil right now, U.S. refiners will be running their plants full out.
Will there be buyers though? China’s imports of petroleum products in January were reportedly down by nearly half from a year ago as its own refineries expand. The Saudis have also started up their Yanbu refinery. And even beleaguered European refineries have been ramping up to make some rare profits from cheap oil.
So with weak demand it looks like U.S. oil storage will just keep filling up. The good thing is that outside of Cushing there’s still some room. According to the U.S. Energy Information Administration, 60% of total U.S. oil storage is currently filled, compared with 48% a year ago. Cushing, they say, is 67% filled. Drillers should count on some tough weeks ahead for oil prices.
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WC Turck is an author, artist, playwright and talk radio host in Chicago. He has been called the most dangerous voice on the Left. His new book “Shoot Down: is an unflinching look at the events leading up to the shooting down of Malaysia Air Flight 17.” His first novel, “Broken” was recommended by NAMI for its treatment of PTSD. In 2006 he published “Everything for Love,” a memoir of his experiences during the siege of Sarajevo. He wrote and produced two critically acclaimed plays, “Occupy my Heart” and “The People’s Republic of Edward Snowden.” He works with the homeless and foreclosure victims in Chicago. He partners in a weekly radio show dedicated to issues, society and politics with cohost, activist and artist Brian Murray For more information, past shows, videos and articles, visit www.revolutioandbeer.com
The Illinois Policy Institute (IPI) is a conservative think tank with offices in Chicago and Springfield, Illinois, and member of the State Policy Network. IPI is a member of the American Legislative Exchange Council (ALEC) as of 2011. IPI is also a member of ALEC’s Health and Human Services Task Force and Education Task Force. Senior Budget and Tax Policy Analyst, Amanda Griffin-Johnson, presented model legislation (the “State Employee Health Savings Account Act”) to the HHS task force at ALEC’s 2011 annual meeting. Collin Hitt, Director of Education Policy, is a private sector member of the Education Task Force representing IPI. He sponsored the “Local Government Transparency Act” at the ALEC 2011 States and Nation Policy Summit. In its 2006 annual report the Cato Institute states that it made a grant of $50,000 to the Illinois Policy Institute. The Cato Institute is a libertarian think tank founded by Charles G. Koch and funded by the Koch brothers.