The weekly EIA report came out today and one of the noteworthy data points was the Cushing, Oklahoma storage numbers. Already at a record, Cushing added another 1.8 million barrels to storage sending total Cushing stocks to 51.9 million barrels of oil in storage facilities at the energy hub.
There has been 6.3 million barrels of oil added to Cushing during the last 6 weeks. To put these build numbers into perspective, Cushing oil inventories stood at 28.3 million barrels for this time a year ago, which is a build of 23.6 million barrels in a year.
Seaway Pipeline Expansion
The Seaway pipeline was recently expanded to 400,000 barrels per day from 100,000 barrels per day, and many analysts have predicted that this would solve the Cushing oil glut. But it is looking more and more that what the Seaway pipeline offers is a cheaper mode of delivery out of Cushing, and the real benefit is one of logistical optionality for transportation.
Further Reading – Keystone XL Pipeline: Economics, Idealism and Politics
However, it is shaping up due to the sheer size of these build in inventories at Cushing that the Seaway pipeline is not a magic solution for the supply and demand fundamentals at play in the oil industry in the United States, there is just more US production, than there is US infrastructure in place to deal with the trending upturn in this production.
Oil is Fungible
In short, the US and global oil model isn`t set up for the United States to be producing more than 7 million barrels of oil per day. Even if the Seaway pipeline could send 4 million barrels of oil out of Cushing, it wouldn`t make a difference because Oil is fungible, so without major cuts somewhere else in the global supply chain, then you’re going to have supply andstorage builds somewhere in the supply chain.
Saudi Arabia can only cut back production so much
The Saudi`s have already cut back production to fifteen month lows, how long is that going to continue as they need oil revenue just like everyone else? So Cushing is just a reflection and end point for the delivery of increasing US production, which ultimately is building more than there is demand from refiners for producing products, even with an increase in exporting of gasoline and other petroleum products.
Cushing never was landlocked
This should have been apparent to analysts as rail has been delivering Oil to refiners during this domestic boom, and so are barges taking oil out of Cushing, so large amounts of oil are getting to refiners. Some of it before it even gets to Cushing, and some after with the Seaway pipeline, and barges out of Cushing; and with the spread in 2012 of as much as 25 dollars, there were major incentives to get US oil to refiners in a myriad of ways.
Cushing builds reflective of bigger problem
Yet we have almost doubled Cushing`s inventories in a year. This points to a much bigger problem with analysts missing entirely, thinking this was just a Cushing log jam problem. This is seeing the trees, and missing the overall forest, Cushing is just a reflection of the bigger problem, there is just too damn much oil sloshing around the world right now with nowhere to go.
Further Reading – Cushion 50 Million, Boom & Bust Cycles, U.S. Debt & Recession
You see this in stories about Nigerian crude for February delivery being unsold and stuck on cargo ships because there are no buyers with the increase in US domestic production. Iraq is producing more oil, and they need the revenue so expect more oil coming out of Iraq for the next decade with each year producing more than the previous.
The world is producing more oil than is consumed each day
The world global supply chain is producing more oil than the world needs every day, and this means storage has to build somewhere, and whether it is Cushing, or Nigeria, or China it has to be stored somewhere.
In the US, Cushing has expanded storage facilities the past couple of years, and has been a default place to send the extra oil. But even Cushing is rapidly reaching capacity limits, and even if on the margin the Seaway pipeline takes out more oil, refiners can only handle so much more before they become the bottleneck in the equation.
Further Reading – Oil and Gas Markets End 2012 With Swollen Inventory Levels
US Refineries not easy to build
Remember, refiners are not easy to build, and the US has only relatively recently ramped up domestic production, so even with substantial increases in fuel exports, there just are not enough US refineries to handle the increase in US oil production. In short, the oil model of the last decade was not set up with the US being a major producer. The US production increases is throwing the global supply models a major curve ball.
Therefore, the only way that Cushing inventories are going to go down substantially is if more US refineries are built, and that could take three to four years, if they are built at all given the regulatory and financial hurdles that have prevented progress in this area over the last decade.
The bottom line is that the Seaway pipeline is no cure for what ails Cushing inventory builds. For what ails Cushing is the fact that nobody thought about the unintended consequences of a boom in US oil production due to high prices for the past decade.
The global economy has slowed down from the peak in 2007, but prices have remained high, this resulted in increased production projects globally, and the rise in US production just sent the supply levels over the edge.
Furthermore, nobody ever planned or expected that the US would start producing with these numbers ever again. This has thrown the whole supply chain on its back, Cushing is just a reflection of this fact, there is more oil than the world needs right now, and the world definitely didn`t need an increase in US production.
Cushing builds still a problem
As a result you get Cushing, the manifestation of what happens when the unexpected happens before the oil models know what to do with the extra supply. You do not get the kind of builds at Cushing, with a new pipeline in existence for six months, a hefty spread, and rails transporting oil at unheard of levels, unless there is a much bigger problem than just increasing the Seaway pipeline by 300,000 barrels per day.
The Seaway Pipeline just steals business from Railroads & Barges
So Seaway doesn`t solve the Cushing problem as many have hoped. All Seaway does is maybe take some business from barges and railroads in the transportation of the product.
But the problem was much bigger than these people ever realized, because Cushing never represented a landlocked, logistics equation.
Cushing builds represents the fact that right now there is just too damn much oil that is being produced versus consumption needs for that oil. So it has to be stored somewhere, and Cushing is one of the places.
Too many chefs in the kitchen
The real problem is that nobody ever planned for the US to be producing 7 million barrels of oil every day and rising, there is just not enough demand in the world for this extra oil, so it has to be stored because everyone needs the money these days. And until prices drop substantially, no one is going to cut back producing this black gold.
(RTTNews.com) – Enterprise Products Partners L.P. (EPD) and Enbridge Inc. (ENB, ENB.TO) said Thursday that modifications to the Seaway crude oil pipeline allowing it to transport crude oil from Cushing, Oklahoma to the U.S. Gulf Coast have been completed.
According to the companies, the pipeline is in the process of being commissioned, and the first flows of crude oil into the line are expected to begin this weekend.
The reversal of the 500-mile, 30-inch diameter pipeline, which had been in northbound service since 1995, provides North American producers with the infrastructure needed to access more than 4 million barrels per day of Gulf Coast refinery demand.
The reversal will initially provide 150,000 BPD of capacity, which is expected to increase to more than 400,000 BPD in the first quarter 2013 with additional modifications and increased pumping capabilities.
Seaway Crude Pipeline Company LLC is a 50/50 joint venture owned by affiliates of Enterprise Products Partners and Enbridge Inc. In addition to the pipeline that transports crude oil from Cushing to the Gulf Coast, the Seaway system is comprised of a terminal and distribution network originating in Texas City.
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March 27, 2012 | 9:30 p.m.
Standing at a podium in front of piles of pipes in Cushing, Okla., last week, President Obama unveiled an executive order meant to speed federal permitting of pipeline infrastructure, including the southern portion of the controversial Keystone XL oil pipeline. Critics immediately jumped on the move, accusing Obama of being “the rooster taking credit for the dawn” and arguing that no federal action is actually needed for that portion of the Keystone pipeline to move forward. National Journal’s Energy & Environment Insiders agree.
More than 70 percent of Insiders said that Obama’s executive order was unnecessary, with some even saying the move smacks of federal overreach.
Insiders overwhelmingly agreed that the southern portion of the Keystone XL pipeline, which will run from Cushing to refineries in Port Arthur, Texas, only needs local approval. States typically handle the siting of interstate oil pipelines, while the only federal involvement normally comes from the Federal Energy Regulatory Commission, the Army Corps of Engineers, and the U.S. Fish and Wildlife Service.
Obama’s involvement in the approval process is “not even remotely necessary,” said one Insider, arguing that Obama’s campaign likely thought it was “politically necessary to invent an executive action to [stanch] the coming decline in the polls.”
The Cushing campaign stop came just a day after Gallup released a poll showing that nearly 60 percent of Americans think the U.S. government should approve the entire Keystone project, which Obama rejected in late January.
“The Cushing event was all show … but a well-executed one,” said another Insider.
Still, by rejecting the permit for the full pipeline—which would run from Canada to the Gulf Coast—and then going full-force in supporting the southern section of the pipeline, Obama is sending out inconsistent messages to the public, Insiders said.
“This is a local permitting decision. The president getting involved looks like federal government interfering in the traditionally local decision of land-use planning—and it likely won’t actually change the permitting process, which is already under way,” said one Insider. “Not great optics—and I say this as a fan of the president.”
Even some of the 29 percent of Insiders who said the Obama administration should be involved argued that it is not legally necessary but noted that it is politically important.
“It is necessary in a political sense, to demonstrate that the administration is doing everything it can to lower high gas prices,” said one Insider. “But even without the administration’s involvement, the southern portion of Keystone will get built and, shockingly, gas prices will remain high.”
Insiders overwhelmingly agreed that the southern portion of the pipeline won’t do much for oil prices. Asked whether prices will go up or down once this piece of the pipeline is completed, 75 percent of Insiders chose “neither,” a mere 14 percent said prices would go down, and 11 percent said they would go up.
“You need to connect the hose to the spigot if you want to water the lawn,” one Insider said, arguing that only the approval of the full Keystone XL pipeline project would affect prices.
Insiders said that aside from some efficiencies in delivery, this portion of the pipeline won’t have much of an impact.
“It will only have an impact on the price of oil if investors see the construction as a sign of things to come in terms of fostering more domestic development,” said one Insider.
- Obama said ready to push partial Keystone XL approval (mb50.wordpress.com)
- Keystone XL Pipeline Has Competition – WSJ (247wallst.com)
- President Obama Promises Fast Track for Keystone XL’s Southern Leg (TRP) (247wallst.com)
- Claims Keystone XL pipeline will destroy Oklahoma historical sites is disputed (newsok.com)
- Obama Headed For Defeat in Pipeline Fight – Byron York – Townhall Conservative Columnists (gds44.wordpress.com)
Josh Lewis , 27 March 2012 04:45 GMT
The addition will increase the capacity of the pipeline by 450,000 barrels per day to 850,000 bpd.
Enbridge said the expansion was supported by additional commitments received during the supplemental binding open commitment period, with terms ranging from five to 20 years.
Enbridge also announced it planned to proceed with the expansion of its Flanagan South project which would add incremental capacity for shippers seeking transportation from Flanagan, Illinois, to the US Gulf Coast.
The Flanagan South pipeline will also be used to transport some of the additional commitments for the Seaway pipeline from Flanagan to the Seaway System.
“Expansion of the Seaway pipeline, along with Enbridge’s Flanagan South project, will provide crude oil producers in the Bakken region and other emerging crude oil sources capacity to move secure, reliable supply to US Gulf Coast refineries, offsetting supplies of imported crude,” Enbridge chief executive, Pat Daniel, said in a statement.
Enbridge said the first phase of the reversal of the Seaway pipeline was nearing completion and would provide 150,000 bpd of southbound takeaway capacity from Cushing to the Gulf Coast by 1 June.
It added pump station additions and modifications, which are expected to be completed by the first quarter 2013, would increase capacity to 400,000 bpd, assuming a mix of light and heavy grades of crude.
- Seaway – Echo terminal link planned (mb50.wordpress.com)
By Dan Potter
President Obama staging a photo op at the TransCanada pipe yard outside of Cushing today angers members of the Domestic Energy Producers Alliance.
DEPA’s Mike Cantrell says the President has proven for three years that he is against the fossil fuel industry.
“The irony of it is, he’s been unsuccessful because Congress wouldn’t go along with him. And now, he takes credit for the gains we’ve made in oil and gas production which have nothing to do with him and his policies. They’ve (occurred) in spite of him and his policies,” Cantrell said.
DEPA has cancelled plans to stage a protest in or near Cushing during the President’s visit.
“They’ve changed it from campaign visit to a state visit,” says Cantrell. “It’s not open to the public.”
The President’s press entourage will be bussed from Oklahoma City to the Cushing event so even they wouldn’t come in contact with any protestors.
When asked what he’d say if he had a few minutes with President Obama, Cantrell says, “I’d say, Mr. President, we’d like to visit with you about domestic oil and gas. And that there’s a difference between U.S. domestic energy producers and royalty owners and the big oil companies that you seem to lash out at. But, in your lashing out at them, you have hit us all with your policies.”
- Obama said ready to push partial Keystone XL approval (mb50.wordpress.com)
- Obama flip-flops on Keystone XL pipeline (rt.com)
- Not a friendly greeting for the president’s energy tour (politico.com)
News wires 02 March 2012 02:57 GMT
The proposed pipeline would be about 40 miles long, Enbridge executive Brad Shamla told Reuters.
“We are shipping crude out over a dock to other destinations on the Gulf Coast,” he said.
Shamla said that pipeline will be about 80 miles in length and be done in 2014.
The plan was announced as the companies continued their purging of the 500-mile Seaway pipeline, which they said was ahead of schedule.
The pipeline will begin by carrying 150,000 barrels per day by 1 June from the oil hub of Cushing, Oklahoma, to Gulf Coast refineries, said Shamla.
The pipeline is the first of several projects to siphon the glut of crude oil sitting in Cushing to the refineries along the Gulf Coast.
The reversed Seaway pipeline capacity is expected to grow 400,000 bpd in 2014 but could increase more if the current open season seeking more firm shipping commitments is successful, Reuters reported.
- Seaway pipeline creates contango with oil glut (mb50.wordpress.com)
- TransCanada to Build Keystone XL Leg (TRP, ENB) (247wallst.com)
- Seaway crude oil pipeline purging for reversal (business.financialpost.com)
- Rail and Pipeline expansions and project to move more Bakken Oil from North Dakota and Saskatchwan (nextbigfuture.com)
- Oil Pipeline from Cushing, Oklahoma to the Gulf Coast will continue (oklahomarealestate.wordpress.com)
- Enbridge, Enterprise advance Gulf Coast pipelines (business.financialpost.com)
Here are some of the questions we’ll be pursuing regarding the reversal of the Seaway Pipeline, announced earlier this morning as part of the sale by ConocoPhillips of its 50% Seaway stake to Enbridge Energy Partners.
–The Brent/WTI spread has been less than $10/b on the news, a movement of as much as $3/b in one day. It’s been as wide as $27 in recent months. We wrote about a prominent analyst predicting it would go to $40.
But here’s another number: $7. That’s the figure that has been thrown about loosely about how much it costs to move a barrel of crude out of the Bakken by rail to the Gulf of Mexico or to other points. There is obviously a great deal of variability depending on where the oil is going. But the key point is if the Brent/WTI spread continues to narrow on both the news and the early 2012 start of 150,000 b/d of crude moving down Seaway to the Gulf of Mexico, does the spread narrow so much that the $7 train ticket for a barrel of crude become too steep? And if that happens, does the Seaway reversal, at a certain point hinder rail enough that it makes that option for moving Bakken crude less competitive?
When the NYMEX light sweet (i.e., WTI) price was consistently more than the Brent price, the deliverability of those grades always acted as a brake against the price of WTI running away from the rest of the market, due to its disconnected state from the rest of the world. If Merc crude got too high, the deliverability would allow these grades to be moved up Seaway and delivered against the Merc contract, keeping the Merc price in check. This became moot when the price of WTI collapsed relative to Brent. But the other deliverable crudes remained on the books.
Without Seaway running from the Gulf of Mexico to the NYMEX delivery point of Cushing, Oklahoma, how could those grades get there? So do they remain as deliverable crudes?
–The quick hit list of winners and losers might look something like this:
Winners: Gulf Coast refiners, with pipeline access to all the oil sands and Bakken crude flowing into Cushing; North Dakota producers (if they can get the oil from the Bakken down to Cushing in the first place); Enterprise Partners, who won’t need to build the Wrangler Pipeline to capitalize on the need for a Cushing-Gulf Coast crude line, since it will own 50% of a now reversed Seaway Pipeline
Losers: exporters of crude to the US, whose market into the Gulf Coast may close a bit as more oil drains from tanks at Cushing and down to the Gulf Coast; railroads, for the reason listed above; possibly the Keystone XL Pipeline, if its MarketLink section from Cushing to the Gulf gets pushed aside by Seaway (as if it didn’t have enough other things to worry about, and also the fact that TransCanada officials said today it could compete); Midcontinent refiners who almost certainly will see their tremendous refining margins shrink.
Source – The Barrel
- Enbridge, Enterprise Products To Reverse Seaway Crude Oil Pipeline (mb50.wordpress.com)
- Oil rises above $100 on planned Seaway pipeline reversal (business.financialpost.com)
- Enbridge buys 50% of Seaway pipeline (theglobeandmail.com)
- Crude Passes $100 (zerohedge.com)
- Enbridge buys $1.15 Seaway oil pipeline stake (cbc.ca)
- ConocoPhillips selling pipelines for $2 billion (marketwatch.com)