Owners of US oil storage stay cautious despite bumper
volumes
by Brian Baskin
16-01-09
Tank operators at the most prominent oil storage hub in the US aren't
seeing much additional profit from record demand for their services.
Because the city of Cushing, Oklahoma, acts as a delivery point for the
physical barrels that underpin crude oil futures on the New York Mercantile
Exchange, it's one of the world's most closely watched terminals. More oil
is stored at Cushing than anywhere else in the US outside the Strategic
Petroleum Reserve. The city is hooked into pipeline networks stretching from
Western Canada to the Gulf Coast's oil ports.
For the first time in years, Cushing's tanks are almost full, and are likely
to remain so for months. Yet, for the most part, their owners are taking a
pass on what is shaping up to be one of the best markets in a generation for
storage. Those companies accumulated tanks over the years under the
assumption that they would earn a steady stream of income by signing
long-term leases with producers and refiners.
The storage companies are being tempted away from that conservative business
model by the emergence of highly profitable trading strategies that exploit
differences between the price of crude now and the price of crude in the
future. Currently, the beneficiaries are the holders of the long-term
leases, mainly large oil companies, refiners and trading firms.
As long-term storage contracts come up for renewal, terminal operators will
have a strong incentive to charge higher rates for shorter leases, or even
to build new tanks. Far more oil is being produced than refiners in weak
economies want to process. The supply overhang invariably ends up in
storage.
Low demand also drives down the price of near-term oil futures, creating an
incentive to hold crude in storage. Earlier, a record 33 mm barrels were
held in tanks at Cushing, brushing up against usable storage.
The vast majority of those tanks are owned by just four companies: BP;
Enbridge Energy Partners, a unit of Enbridge; Plains All-American Pipeline;
and SemGroup Energy Partners. All but BP have added significantly to their
storage capacity in recent years, with an eye on holding Canadian crude on
its way to the Gulf Coast. Most tanks are leased out for two years, with the
newest contracted for up to 10 years. Chasing profits in the oil market is
seen as their customers' concern.
"Quite frankly, the... market is so difficult to follow and predict," said
Bruce MacPhail, who oversees contract storage for Enbridge, which owns the
most capacity at Cushing. "We're not experts; we're infrastructure players.
Our preference is to contract out space to parties who have that expertise."
Even so, Enbridge is considering shorter leases for tanks whose long-term
contracts end this year, MacPhail said.
Running out of room
As the world's extra oil fills up storage terminals, both the physical and
futures markets are contorting to compensate. February futures traded at a $
8.65 discount to March. The spread between the two front months was 56 cents
in mid-November. Light, sweet crude oil for February delivery settled $
1.11, or 3.1 %, higher at $ 36.51 a barrel on the Nymex.
Until recently, companies with long-term leases at Cushing could arrange to
buy and sell oil in the futures market, locking in a price increase far
bigger than the cost of their storage fees. The price of oil in the physical
market has jumped as cheap storage filled up, erasing that gap. Oil
companies and trading firms have even taken to using tankers as "floating
storage."
"If you didn't put that (storage) play on in November and December, your
opportunity is over with," said Jeffrey Currie, head of commodity research
at Goldman Sachs Group. Some of the tank owners at Cushing hold onto storage
in order to take advantage of the futures spreads, but rarely set aside more
than a quarter of their capacity.
"That's really not their business," said Mark Easterbrook, an analyst with
RBC Capital Markets. "They want to sell that capacity out... and get paid no
matter what. They're not there to hit home runs when an environment like
this arises."
Here to stay
It's becoming more difficult to use physical barrels of oil to profit off of
the giant Nymex futures spreads. But analysts see the unusual market
structure as an indication that a large amount of unwanted oil is still
looking for a home in storage. Inventories are likely to remain high through
2010, the US Energy Information Administration said, as it will take at
least until the end of next year for global demand to approach pre-downturn
levels.
"Unless we see something change dramatically... I think the market is
perfectly comfortable with a $ 7 (spread)," said Darin Newsom, a senior
analyst at DTN, a market-information service.
No storage terminal operator has announced plans to build new tanks at
Cushing, but the temptation will grow the longer the supply overhang
persists, said Easterbrook, the RBC Capital analyst.
"I wouldn't be surprised if this does continue," Easterbrook said. "They're
probably outlooking right now to see how to go about building some more
storage."
Plains and Enbridge both own land near existing facilities that could house
additional storage tanks, Easterbrook said. Enbridge's MacPhail said the
company would build tanks only if approached by a potential customer looking
to sign a long-term lease.
"If parties came to us... we may consider an expansion, but we are being
somewhat cautious because of the sheer volume of storage now in the Cushing
market," MacPhail said.
Source:
http://www.downstreamtoday.com / Dow Jones & Company, Inc.
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