NEW YORK (Reuters) - Concerns among oil traders are escalating that a combination of surprisingly resilient U.S. shale production and lower autumn refinery demand will cause storage tanks in Cushing, Oklahoma, to fill to the brim with surplus crude as early as October.
The biggest U.S. refinery in the Midwest is suffering through an unexpected outage that may take months to resolve. The shutdown may free up enough crude to top off Cushing in just 2 months, a month earlier than the market expected as recently as last week, sparking a sell-off of oil futures spreads.
“Looks like Cushing is going to be full in October now,” said one oil trader. “That’s very bearish.”
The Sept/Oct spread, which settled at 49 cents on Friday, traded as wide as 82 cents on Wednesday. Meanwhile, the Oct/Nov spread ballooned to an even wider $1.06 on Wednesday versus 75 cents on Friday. Spreads are often an indication as to how healthy Cushing balances look.
Meanwhile, there are more than 57 million barrels of oil currently stored at the delivery point of the NYMEX contract, just 14 million barrels shy of its working capacity, according to U.S. Energy Information Administration estimates.
Some traders say the area may be able to store even more crude if operators are pressed.
The outage comes at a time when other refineries are preparing planned maintenance, lowering demand across the board.
The anxiety in the market is clear: unwanted barrels at Whiting and without a buyer will almost certainly get redirected to Cushing. Whiting’s crude unit can process 240,000 barrels per day. If that entire volume is diverted to Cushing, it would take just 58 days to fill.
Those elements spell trouble for a market readying for another price plunge after a year-long rout lopped off 60 percent of the value of U.S. crude. On Tuesday, U.S. crude futures settled at their lowest value in six years.
“The heavy discounting we see in oil right now suggests there’s a lot of pressure from people holding crude to get rid of it - kind of like a fire alarm. It’s become a buyer’s market,” said Sandy Fielden of RBN Energy.
“The outage is adding to the general congestion of oil.”
Whiting has been increasing its appetite for Canadian oil in recent years, particularly after a major upgrade in 2013. EIA data show nearly 240,000 bpd of heavy Canadian crude was imported in May, up from 212,000 bpd in 2014. For the first five months of 2015, it imported an average of 227,000 bpd, up from 147,000 bpd in the same period a year ago.
Whiting receives crude from Enbridge Inc’s Lakehead system. Oil leaving Enbridge’s Mainline system can also be redirect to Flanagan, Illinois, and flow to Cushing, Oklahoma via the 600,000 bpd Flanagan South pipeline and the 193,300 bpd Spearhead pipeline.
According to Energy Aspects, “there is little buffer to allow for very large builds from reduced refinery demand, especially as the probability of unplanned outages seems high, given record refinery runs.”
But, Cushing’s build may not be so immediate. On Tuesday, Enbridge Inc said that it shut both its Cushing-bound pipelines due to a spill. The matter should be short lived as Enbridge said later on Wednesday that it was planning to restart the larger of the two pipes by Thursday.
Editing by Jonathan Leff and Alan Crosby