The Peaking of Storage

The crude oil storage levels in the US rose sharply in April 2020 and peaked at 532 million barrels in inventory, representing 62% of working storage capacity, according to the EIA.   The chart below shows the rapid rise in US 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, which was 83% of working capacity, according to EIA data.  For the week ending May 15, 2020, Cushing stocks declined sharply to 56.9 million barrels, or 72% of working storage capacity. 

The peaking of storage levels led to a flattening of the forward price curve in the NYMEX Light Sweet Crude Oil futures contract (also called “WTI futures”) as crude oil production declined and global refinery demand picked up with the reopening 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 in late May 2020. 

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

Further, starting 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 NYMEX LOOP Crude Oil Storage futures contract spiked up to $0.55 per barrel for storage in the May 2020 contract month, up from just $0.07 per barrel for storage in April.  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 $0.25 per barrel in the June 2020 contract month.   

In response to the extreme demand destruction and supply shocks from the Covid-19 pandemic and the recent OPEC+ meetings in March and April 2020, 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 US Gulf Coast market. With the 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 new challenges and will look to hedge the price risk that lies ahead in the “new normal” that will emerge in the global oil market.