February 26, 2015 / 8:12 PM / 5 years ago

As Cushing fills, traders eye Houston to play the storage game

NEW YORK (Reuters) - As rapidly rising oil stockpiles near the limits of storage tanks in Cushing, Oklahoma, traders are quickly turning their sights south to the U.S. Gulf Coast, where capacity is more plentiful but profits more elusive.

The Gulf Coast region boasts nearly 210 million barrels of capacity on oil tank farms, more than a half of the nation’s total, according to U.S. data from September. There’s another 75 million barrels in refinery sites, and analysts estimate a further 45 million connected to pipelines.

As of last week, only 214 million barrels were stockpiled on the Gulf Coast, just tiny bit below last May’s record-high levels, data show.

With little sign of a global glut letting up soon, oil traders are scrambling to secure short- or medium-term leases to stockpile deeply discounted prompt crude, with the hope of selling it for some $12 a barrel more in a year’s time thanks to a market structure known as contango. In theory they can use oil futures to lock in a near-guaranteed return.

In practice, the Gulf Coast storage trade is a much trickier proposition than it is in Cushing, where storage tank leases are actively traded on a secondary market; the infrastructure is broadly flexible; and the delivery point for U.S. oil futures provides an exit for the trade.

Gulf Coast lease rates of around $1 a barrel per month were already two or three times higher than in Cushing last year, and more recently have risen to near $1.20 to $1.25 a barrel, according to market sources who have leased or inquired about space.

For the storage trade to work, the current contango may need to grow much deeper. The spread between first-month WTI and the one-year-forward contract widened to nearly $12 a barrel on Thursday after hovering between $9 and $11 for four weeks.

“There’s a lot more availability for storage in the Gulf Coast, but prices will have to do the work,” said Amrita Sen, chief oil analyst at Energy Aspects.

HOUSTON VS CUSHING

Until recently, traders chose to park their crude in Cushing, the delivery point for the U.S. crude futures contract. Inventories there have risen by 25 million barrels over 12 straight weeks, by far the largest build in Energy Information Administration records going back 11 years.

But space is rapidly running out, and options to lease more storage are nearly nonexistent, traders say. At the current rate, inventories could reach their theoretical maximum of 60 million barrels by April.

“No one wants to talk about a price (for Cushing storage) anymore,” said one trader.

In recent earnings calls, Blueknight Energy Partners LP executives said they are above 90 percent utilization on their Cushing leases, while NuStar Energy LP executives said they are at nearly 98 percent capacity.

Far more space is available along the U.S. Gulf, or Padd III, even though inventories there have also risen by 8.5 million barrels in the three weeks to 214.5 million barrels in the week to Feb. 20, data from the U.S. EIA showed on Wednesday.

For graphic on U.S. Gulf Coast stocks vs capacity: link.reuters.com/qer24w

Still, Genscape estimates that there’s some 52 million barrels of empty storage just in the Houston area alone, where companies such as Enterprise Product Partners LP and Sunoco Logistics Partners LP operate large commercial tank farms. Citigroup estimates around 40 million barrels.

Making money on the Gulf, however, is no simple matter.

At Cushing, there are more than two dozen lines bringing crude in and out of the hub from shale plays and oil fields across the country. Oil in any of the 71 million barrels of working tank space can also be settled against the WTI futures contract, providing liquidity that mitigates downside risk.

In the Gulf, however, storage is dispersed and often poorly connected. Existing capacity is spread some 300 miles across Houston, Beaumont-Nederland and Corpus Christi.

Stockpiling oil on the Gulf may be a last resort rather than savvy trade.

“There’s different motivation when keeping crude in Houston. At Cushing, it’s a pure storage play because it’s much more efficient,” according to RBN Energy analyst Sandy Fielden.

Reporting By Catherine Ngai, editing by Jonathan Leff and Cynthia Osterman

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