December 20, 2011 6:32 pm
US oil boom town prompts crude glut fears
Crude estimates: one company sends a helicopter above the Cushing complex to gauge inventory levels, another uses a satellite
The boom in North American oil production has triggered a race to expand the US’s main oil storage centre, raising concerns among some industry executives of potential glut in capacity.
By next year, the capacity of tanks around Cushing, an Oklahoma town that calls itself the pipeline crossroads of the world, will equal to nearly a day’s of global oil production as refineries, trading houses, Wall Street banks and pipeline companies build or lease hundreds of thousands of barrels of new tanks.
Climbing US and Canadian oil production and price patterns that have made it profitable to store oil underline the building boom in this remote town of 7,800. The town has seen the arrival of an army of workers from welders to tank inspectors in X-ray trucks. With apartments fully occupied, oil workers are living in temporary trailer parks.
New construction will raise the hub’s tank capacity to a record 79m barrels by the end of next year, up nearly a fifth from this year and and 2½ times from 2006, according to consultants Lipow Oil Associates. Cushing is the delivery point for US oil futures and, thus, the most crucial point in the country’s oil trading.
But the race is raising concerns about overbuilding, which could hurt conservative investors. Several tank owners are structured as master limited partnerships, an increasingly popular option for investors seeking steady yields.
“It’s hard for me to rationalise why you’d build any more,” said James Dyer, chief executive of Blueknight Energy Partners, with 6.4m barrels of capacity at Cushing.
Lease rates may come under pressure as capacity grows, hitting the profitability of master limited partnerships. Rose Rock Midstream, which is building tanks, said average rates are down from 2010. Andy Lipow of Lipow Oil Associates said every tank in Cushing had been rented, but added: “The question is: as tankage comes up for renewal, what is the new lease rate going to be?” The worry about an overbuild is not mainstream, however. Some executives see growing demand for storage as North American oil output continues to increase.
Pete Schwiering, president of SemCrude, which operates Rose Rock, said: “There’s still demand out there. I think there will continue to be as we see this boom in domestic production coming online. You’re going to need tanks.”
Mike Mears, head of Magellan Midstream Partners, which leases tanks in Cushing to BP and others, added: “Is this a short-term phenomenon? We don’t think it is.”
Oil stocks at Cushing were earlier this month at 31.2m barrels, suggesting that half of the tanks were empty. Yet, new pipelines, such as the projected Keystone XL linking Canada with Cushing, could bring more oil to the hub.
Copyright The Financial Times Limited 2011
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