The Peaking of Storage

The crude oil storage levels in the US rose sharply in April 2020 and peaked at 541 million barrels in June 2020, representing 62% of the total working storage capacity in the US of 672 million barrels, according to the EIA.  By the end of July 2020, US crude oil inventories declined to 526 million barrels, or 59% of working storage capacity. The chart below shows the rapid rise in U.S. crude oil stocks and the recent decline.

In Cushing, inventories rose at a record pace of 23 million barrels during the month of April 2020, peaking at 65 million barrels in storage on May 1, 2020, which was 83% of the working storage capacity of 76 million barrels, according to EIA data.  As of the end of July 2020, Cushing stocks declined to 51.4 million barrels, or 65% of working storage capacity.

The peaking of storage led to a flattening of the forward price curve in the NYMEX Light Sweet Crude Oil Futures Contract (also called “WTI futures”) in May 2020 as crude oil production declined and global refinery demand slowly recovered with the re-opening of economies after the COVID-19 pandemic.  The market responded quickly to the arbitrage price signals, and consequently, WTI futures moved from a “super-contango” price structure in early April 2020 to a modest contango time-spread structure by late May 2020. 

The last period of “super-contango” in WTI futures occurred in early 2009 during the demand destruction after the financial crisis in 2008, and again in 2011 when the takeaway pipeline capacity in Cushing was constrained prior to the reversal of the Seaway Pipeline in 2012. 

Further, in March 2020, storage rates rose sharply in Cushing and at the LOOP terminal in Louisiana, as companies rushed to take advantage of the storage economics in the marketplace.  In fact, CME Group’s LOOP Crude Oil Storage futures contract spiked up to $0.55 per barrel for storage in April 2020, up from just $0.07 per barrel for storage in March.  In addition, Cushing storage rates rose sharply, with tankage reaching $0.50 per barrel in a storage auction hosted by Matrix Markets in March 2020.  As crude oil inventories started to decline, the storage rates in the LOOP Crude Oil Storage futures also declined to $0.10 per barrel in June 2020.   

In response to the extreme demand destruction and supply shocks from the COVID-19 pandemic and the OPEC+ meetings, companies have responded to the arbitrage price signals as they strive to manage the price risk associated with the rising level of crude oil inventories.  The volatile price arbitrage pulled barrels into storage at a record pace in April 2020 and the export arbitrage declined in the U.S. Gulf Coast market.  With the slow return of global refining demand, storage levels have peaked and have started to decline as the arbitrage price signals have begun to pull barrels out of storage and re-direct them to the refining sector and the export market.  As the market begins to re-balance, companies will face the challenge of hedging the price risk that lies ahead in the “new-normal” that will emerge in the global oil market.