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Cushing’s Oil Glut Affects Markets Worldwide

Filed by KOSU News in Business, Local News, News.
September 26, 2011

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Hoarding is in fashion in Cushing, Oklahoma. Mike Cantrell, president of Domestic Energy Producer’s Alliance, says the hub of oil storage in North America has an oil problem.

D.E.P.A. represents thousands of small time oil producers, many right here in Oklahoma. They know the leader in storage of the gooey goodness is overflowing. It’s coming from Montana and Texas, and could soon flow from Canada.

“To us in the oil and gas business, Cushing is the mecca,” said Cantrell.

“Because that’s where everyone has to get their oil, and that’s become a problem.”

In New York, oil traders at the Mercantile Exchange need a benchmark. With capacity for more than 50 million barrels of crude, Cushing fills that role. Full tanks mean future prices are higher than current ones.

Emptying tanks? Refine and get it to gas stations before values fall even farther. Traditionally, Cushing’s price, known as the West Texas Intermediate benchmark, trades 3 or 4 dollars higher than the other standard, called Brent. Lately though, Cushing’s been coming in 20 dollars lower.

“Producers are hurt by it and so if you’re selling your oil at the Cushing price instead of 10 or 15 or 20 dollars international price higher, producers suffer,” said head of the National Energy Policy Institute, Brad Carson.

Like Cantrell, and just about anybody in the business, Carson watches Cushing. What he sees is a problem without a short term solution. Pipelines are contracted to send oil to Cushing, not the other way around. There’s only a handful that flow out to refineries, if they even get used. Conoco Phillips, Shell and others would rather make more money by putting oil away.

“They see there’s a market for that. A market for the oil coming in, also a market driven by the fact that for lots of people, storing oil is an economic decision right now,” said Carson.

“They can play the futures curve and store oil and sell it into the future.”

Storage companies have started to build more tanks to accommodate the oil giants. Reports put capacity going to 65 million barrels in the next couple months. But the most talked about solution to the problem takes time.

“Building a pipeline is a difficult thing to do. From a regulatory standpoint, from a right of way, from an economic standpoint it’s very expensive. It’s hard to know what will happen,” said Carson.

“To the extent that this differential in price between the world markets and Cushing persists, I think you’ll see an aggressive move for these types of pipelines.”

Even if those pipelines are built, companies may hold out, said Carson.

“There’s a lot of money to be made there. While it will cost you some money to transport it you would still make a lot per barrel if there’s a 20 dollar difference.”

Still, John Selmy of the American Petroleum Institute, a Washington based trade group representing oil corporations, said no one’s breaking the law.

“The market outcome is the best thing that could happen, and that’s what we’re having right now. It depends on whether you’re a buyer of crude oil or a seller of crude oil on whether or not you want the price to be higher or lower.”

Last month, Citi’s Commodities group predicted the spread between Brent and Cushing could go high as forty dollars next year. Companies may hold out, then buy the oil at the lower price, ship it to their refinery, clean it up, and what’s left would be pure profit. It’s nearly been a necessity in the oil world to get your product to Cushing. Now, it might just be a way to make more money.

Tuesday, KOSU looks at how a lower oil price at Cushing has cost the state of Oklahoma millions of dollars in tax revenue.

Follow Ben Allen on Twitter: @BenAllenKOSU.

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