CORRECTED-UPDATE 1-Magellan Midstream sees a sound future for Cushing business

By Janet McGurty

NEW YORK May 2 (Reuters) - Magellan Midstream Partners sees a sound fundamental outlook for business at the glutted crude oil storage hub in Cushing, Oklahoma, even as pipeline carriers prepare to draw a significant portion of its supply to Gulf refineries, the company told investors and analysts Wednesday during its first-quarter earnings conference call.

Mike Mears, chairman, president and chief executive officer of Magellan, said the company does not expect to see a significant decline in the value of storage at Cushing, nor significant upside in lease rates.

"I think our expectation would be more of a stable environment for the foreseeable future," he said.

Magellan operates storage at Cushing and is trying to win a piece of the pipeline-to-the-Gulf business with its 225,000 barrel per day Crane, Texas to Houston pipeline.

Inventories in Cushing, the delivery point of the NYMEX futures contract, reached their highest levels ever at 42.96 million barrels for the week ended April 27, according to government data released Wednesday.

During the first quarter, Magellan said first quarter revenues from its terminal segment rose $8.1 million year over year, aided by 4.2 million barrel storage increase in Cushing incremental crude oil storage.

Several pipeline projects are under way to move the glut of low-priced crudes stored at Cushing down to the U.S. Gulf Coast. This includes TransCanada's controversial Keystone XL pipeline and the Seaway reversal venture between Enterprise Products Partners and Canada's Enbridge, which is expected to start flowing around May 17.

"The Cushing market ... is really driven by a couple of things," Mears said.

He noted that market structure -- if it is in a contango or backwardated -- impacts storage. Contangoed markets make prices going forward higher than present day, making storage a good option to get the best price for a barrel of crude.

"You've got blending opportunities around controlling storage. We don't think that is going to go away. In fact, we think that may grow in Cushing," said Mears.

"As more crude oil flows through Cushing, different kinds of oil flow through Cushing, it's going to create blending opportunities for those market players that do blend."

The explosive growth of domestic crude oil plays like those in the Eagle Ford Shale Oil formation are feeding the trend. The crude, which is very variable in quality, is very light and sweet and needs to be mixed with more sour grades to make it palatable for refineries in Texas City and along the Gulf Coast.

"The third thing is that the increased domestic production, you're going to have increased flow of crude oil throughout the country, probably the cheapest place in the country to build and operate storage is Cushing, Oklahoma," Mears added.