The tanks in Cushing, Oklahoma, are hitting bottom. The oil market is about to hit a tipping point
By David Goldman, CNN
(CNN) — Cushing, Oklahoma, dubs itself the pipeline crossroads of the world. The tagline is emblazoned on a giant roadside sign fashioned out of pipes on the corner of Main Street and South Stiles Road. It has a valve and everything.
But it’s not just a slogan.
In 1912, Tom Slick (his real name) was passing through what’s now Drumright, Oklahoma, when he smelled oil. He bought the land for $1 an acre and started digging, uncovering what was then Oklahoma’s biggest oil well.
Today, neighboring Cushing is the hub of America’s energy market. It literally provides the oil plumbing for the United States. It’s where America’s benchmark West Texas Intermediate oil is priced and warehoused. From there, it’s piped to refineries around the country.
In normal times, Cushing stores around 40 million barrels of oil with capacity of up to 75 million.
These are not normal times.
Why Cushing is running out of oil
Cushing’s current inventory is 21.6 million barrels, according to the US Energy Information Administration.
That’s dangerously close to operational stress levels, the tipping point at which Cushing struggles to supply all of its customers with the oil they demand.
When Cushing’s reserves get below 20 million, they effectively hit empty, scraping the bottom of the barrel of what is largely unusable sludge.
And when Cushing runs empty, strange things happen to the oil market.
Unless the Strait of Hormuz opens soon – very soon – we’re probably just weeks away from finding out what that looks like.
Cushing is running out of oil because America has become the supplier of last resort for regions of the world that typically get their oil and fuel from the Middle East. Demand for US oil surged to a record high during the Iran war, and crude has flowed out of Cushing faster than America’s oil drillers can refill it.
But it’s not just a Cushing problem.
US diesel stocks recently hit their lowest level since 2003. Gas inventories have been falling, too – about 5% below where they were a year ago. Other US commercial crude storage facilities outside of Cushing are also getting drained fast – by 7.2 million barrels last week alone.
What happens when tanks run dry
It certainly doesn’t feel like the US oil market is in any real trouble.
Despite the largest crude supply shock the world has ever seen, US oil and gas prices still haven’t hit record highs during the three-plus months of war with Iran. And they’ve been sliding – sometimes sharply – in recent weeks.
That’s largely because the world was historically oversupplied with oil going into the crisis. Those stockpiles have acted as a global shock absorber.
But commercial oil inventories are rapidly dwindling. Oil stockpiles in the world’s wealthiest nations are falling by 6.3 million barrels per day and are sitting at just 2.6 billion barrels, according to the US Energy Information Administration. That’s just 100 million barrels above operational stress levels, said David Oxley, chief climate and commodities economist at Capital Economics.
The oil market can’t run down to the last drop, like your car can. Below a certain threshold, pipelines can’t maintain pressure and refineries can’t deliver all the various fuel grades their customers demand.
“Like blood pressure in the human body, the issue is circulation,” said Natasha Kaneva, head of commodities strategy at JPMorgan. “The system does not fail because oil disappears, it fails because the circulation network no longer has enough working volume.”
At this rate, the world’s oil market could enter the danger zone within a month.
That means the market could easily go into panic mode because of a minor problem. Prices could become extraordinarily volatile day to day, and a pipeline leak, a refinery fire or a weather even could send oil and gas significantly higher.
Two solutions. Neither pretty
An export ban could help keep Cushing from running dry and threatening to choke up the whole system. But that has little political traction and is fraught with potentially unpleasant side-effects, including higher prices in the long-term.
The other solution is for natural market dynamics to take over. And those could get ugly in a hurry.
Every time Cushing has neared operational minimums, fuel prices have hit historic highs: 2008, 2022, 2023 … and, in perhaps a matter of weeks, we’ll hit that critical level again.
“We’re raising alarm bells right now,” American Petroleum Institute CEO Mike Sommers told CNN’s Phil Mattingly on The Lead this week. “We’re getting to levels where we are starting to be concerned.”
“Unheard of” inventory levels are reaching a breaking point, said Neil Chapman, senior vice president of ExxonMobil, at a conference hosted by Bernstein in New York on May 28.
“Once you get to that point, then you’ll see prices shoot up,” he said.
Chevron CEO Mike Wirth, at the same conference, agreed that ultra-low inventories will mean higher prices in the coming weeks. Same goes for the heads of the International Energy Agency, International Monetary Fund, World Bank Group and World Trade Organization, who released a statement on May 29 that noted the record-pace depletion of global oil inventories poses growing risks to fuel security, the market and the broader economy.
Oil could easily march above $90 today toward $140 to $160 a barrel in the coming months, and gas could top $5 if the strait doesn’t fully reopen, said Oxley.
“They could feasibly peak even higher,” he said.
Eventually, the market could find ways to increase supply, similar to how European airlines cut flights and raised airfares to give the industry time to find a new jet fuel supplier: the United States.
But if the situation doesn’t resolve itself by year-end, prices would need to rise much, much further – closing in on $200 a barrel, said Alan Gelder, head of refining, chemicals and oil markets at Wood Mackenzie.
That would put gas prices around $9 a gallon – high enough to effectively kill demand for gas and oil for most consumers.
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