Cushing and beyond: A race to the bottom

In the brave new world of oil where no contango is too steep or short position too extraordinary, the race to the bottom is, in fact, a race to the top as oil storage reaches its physical limitations. After a record 19.3 million barrel crude build for week 15, we now anticipate a 23.6 million barrel build for week 16, an even more devastating blow to the already overfilled storage situation at Cushing and beyond.

Ahead of the weekly DOE US inventory numbers due to be published at 4:30 pm CET/10:30 am EST on Wednesday, Rystad Energy’s Oil Market Research team expects a crude stock build of 23.6 million barrels for the week ending April 17 (week 16), eclipsing the record of 19.3 million barrels reached in the previous week. Refinery crude intake could fall below 12.0 million bpd in the upcoming weeks as refiners continue to adjust utilization rates to match the strenuous fall in road fuels and jet fuel demand. In addition, we find that the drop in refinery runs is unlikely to be matched by a drop in equal magnitude in the supply side. US oil production is likely to hold steady above 12.0 million bpd in the following weeks and crude imports are forecasted to remain at around 6.0 million bpd as an armada of Saudi cargos is fast approaching US shores.

Our forecast for the week ending April 17 is more bearish than the median analyst estimate for builds of 14.4 million barrels and 13.0 million barrels, as forecasted in the weekly survey run by Bloomberg and S&P Global Platts, respectively. The API (American Petroleum Institute) is set to report its estimate later today.

EIA weekly report for week 14

During week April 10 (week 15), the EIA reported the largest-ever build in US commercial crude stockpiles – 19.3 million barrels. This absolutely blew out of the water the analyst expectations of 12.7 and 10.1 million barrel builds in the weekly survey ran by Bloomberg and S&P Global Platts, respectively. The API forecasted stocks to rise by 13.1 million barrels, while Rystad Energy had forecasted stocks to build 17.2 million barrels.

Storage is filling rapidly as refiners reduce how much crude they feed into their system. At 503.6 million barrels, commercial crude stockpiles are more than 6% above the five-year average for this time of year, and just 32.0 million barrels away from hitting the record level of 535.5 million barrels from the spring of 2017. This time, the bulk of the build was concentrated in the Gulf Coast (PADD III), where inventories increased by 10.2 million barrels to 263.4 million barrels. Year-to-date, PADD III commercial crude inventories have ticked up by 44 million barrels (or 20%), leaving tanks and refineries with about 168 million barrels of available capacity. Inventories in the Midwest (PADD II) also built at an accelerated, jumping 5.7 million barrels to 147.4 million barrels. All the increase came from Cushing, Oklahoma, where crude storage jumped to 55.0 million barrels. The latest build pushed crude tanks at Cushing to over 72% of total capacity, leaving room to store only about 21.0 million barrels. For the week ending April 17, we estimate that stocks at Cushing will rise by about 5.0 million barrels, pushing crude inventories to 76% of capacity.

It is important to highlight that although there is technically still some capacity available at Cushing, Monday’s meltdown in WTI prices exhibits that most of this capacity is not truly available to market participants as some operators hold exclusive rights and are not taking additional barrels, but rather holding their capacity. In addition, a significant portion of this capacity is held for operational purposes and is not available for lease.

Refinery runs and products

Refinery crude intake dropped by nearly 1.0 million bpd during week 15 to 12.7 million bpd, the lowest since September 2008, in the aftermath of Hurricane Ike. The weakened refinery crude runs were driven by evaporating transportation fuel demand. In our base case, we estimate Covid-19 will remove as much as 4.2 million barrels of road fuel demand in April 2020. With several states across the US mandating non-essential workers stay at home to stop the spread of the outbreak, including states with the highest road fuel demand, such as California and New York, we estimate that US gasoline demand is set to decline an unprecedented 3.3 million bpd y/y in April 2020, followed by a 1.9 million bpd decline in May 2020.

The astonishing collapse in gasoline demand will likely push refiners to deepen cut runs and trigger more shut-downs. We currently estimate that US refinery runs in April will fall by 4.1 million bpd y/y to 12.2 million bpd. The Gulf Coast accounts for 1.8 million bpd of the reduction. Midwest refiners are also expected to be hit hard, reducing runs by nearly 1.1 million bpd y/y, as they are landlocked and don’t have access to the export market.

The colossal drop in refinery runs and product output during the previous weeks have led to a stabilization of gasoline storage builds. During the week leading up to April 10, nationwide total motor gasoline inventories ballooned by 4.9 million barrels, down from the 10.5 million barrel build from the previous week. With the latest build, total motor gasoline stocks are just 99 million barrels away from reaching maximum workable storage capacity. Without the run cuts from refiners, the US would have likely run out of places to store finished gasoline and blending components by early-May (as the thin dashed line in indicates). But with refineries cutting crude runs, the US might avoid testing the limits of gasoline storage capacity. American refiners have scaled back their operations by 30-40%, and a couple of refineries have already shut down, bringing nationwide cuts up to more than 23% in April and May 2020.

Despite the reduction in crude runs that literally saved the day, we still see gasoline inventories surging by 30.0 million barrels in the following weeks, as the drop in gasoline demand far outweighs the drop in gasoline output (about 1.8 million bpd for April 2020). The expected builds will require months to be cleared out.