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Cushing crude stocks growth continues, analyst discounts contango as reason

Oil stocks at the US hub of Cushing, Oklahoma, have been steadily climbing over the past eight months despite the slight contango market structure, as demand grows for segregated crude storage.

“I don’t think Cushing storage is attractive for a contango play,” said Sandy Fielden, director of commodities and energy research at Morningstar, citing a “very slight” 20-cent contango between the prompt and third month out on West Texas Intermediate — “not enough to cover costs. Where I think there is demand is in the increasing quality segregation issues.”

The changing quality of light, sweet crude coming out of the Permian Basin and Eagle Ford has created demand for more segregated storage and blending tanks. The fastest-growing production is crude with an API of 45 to 50 degrees API — dubbed West Texas Light by some market participants.

Add to that the increased flow of light, sweet crude from the Rockies and Anadarko Basin, which sprawls over northeast Texas and the Oklahoma Panhandle, and lighter crude volumes increased by over 500,000 b/d between February 2015 and 2019, US Energy Information Administration data shows.

Fielden said “all major pipes out of the Permian (Plains, Magellan, Energy Transfer and EPD) are now segregating WTL — meaning they need more storage at both ends.”

An assay of WTL provided by Enterprise Products Partners assumes 41% of the barrel is light ends naphtha and lighter, with the remainder being low sulfur middle distillates.

When comparing WTL with a barrel of Brent, with a 38% API, WTL yields 12% more light ends. Based on growth predictions of a 5 million b/d increase in Permian-area crude over the next five years, Enterprise assumes that 600,000 b/d of growth will be WTL.

“So lots of opportunity for the midstream guys to sell more storage space,” Fielding said.

The total for all crude stored at Cushing has been steadily rising since September 2018 to stand at 49.069 million barrels in the week that ended May 17, EIA data showed. Cushing is also the price point of the NYMEX light, sweet crude futures contract.

This has been a boon for smaller midstream players with Cushing storage holdings, such as Blueknight Energy Partners. Like many of its peers, Blueknight has struggled with recontracting storage in the contango market, and seen crude storage revenue decline on lower lease rates.

CEO Mark Hurley earlier in May said its Cushing storage was fully contracted, with 5.8 million barrels of crude storage under service contracts in early May, including 3.1 million barrels of storage contracts that expire this year. But one bright spot is demand for blending, he said.

“Our services revenue, which includes blending and throughput, have been very strong this year, and we expect this to continue,” Hurley said May 9 during the company’s first-quarter 2019 results call.

“We’re seeing more and more need for blending and segregation of crude oil grades, driven by factors beyond just the crude oil forward curve,” he said.
Source: Platts

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