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What Happens With Oil Prices If Cushing Inventories Fall To Zero?

Rebounding U.S. oil demand, a slow recovery of domestic production, and extreme weather-related events have drawn many barrels this year out of the key U.S. crude hub at Cushing, Oklahoma. Crude oil stocks at Cushing—the delivery hub for the WTI Crude futures contract—have more than halved since April 2020, when the market was fretting about high inventories as the pandemic forced governments to announce widespread lockdowns. Back then, a lack of storage at the Cushing delivery hub contributed to sending WTI Crude down to a negative price.

The picture is quite the opposite a year and a half later after U.S. oil demand recovered to pre-pandemic levels. At the same time, production remains stifled by strict capital discipline in most of the U.S. shale patch and by storms in the winter and hurricanes over the summer.

Stocks At Cushing Have Halved Since April 2020 Market Rout

From more than 60 million barrels of crude inventory at Cushing back in April 2020, crude stocks at the hub dipped to below 30 million barrels in the week to October 22, 2021, EIA data showed on Wednesday.

Crude stock at the Cushing hub fell by a massive 3.9 million barrels week on week to stand at 27.3 million barrels as of October 22, the EIA's weekly inventory report showed on Wednesday. Cushing crude inventories were down by 54.4 percent compared to the same week last year, and down by 40.6 percent compared to the same week in the pre-pandemic year 2019.

Last week's dip to below 30 million barrels marks the lowest level of Cushing crude inventories since the first week of October in 2018.

How Did We Get Here?

Demand in the U.S. has rebounded this year from the pandemic slump of 2020. Per the EIA data, total products supplied—a proxy for demand—over the last four-week period averaged 20.8 million barrels a day, up by 9.9 percent from the same period last year.

Total U.S. oil demand reached a record high for the month of September at 20.6 million bpd, API's Monthly Statistical Report (MSR), based on U.S. petroleum primary market data through September, showed.

The data "reinforced a combination of developments that has been recurrent so far in 2021 – that is, demand outpaced supply, inventories fell and, consequently, imports and prices rose," API's Chief Economist Dean Foreman wrote earlier this month.

At the same time, U.S. crude oil production has hovered around 11.3-11.4 million bpd in recent months, down from a peak of 13 million bpd just before the pandemic. The Texas Freeze and Hurricane Ida sent domestic crude production down to 10 million bpd for weeks in February and September, respectively.

Meanwhile, the U.S. shale patch has been cautious in ramping up activity, even at $80 oil. Instead, most producers, especially the listed ones, prioritized returns to shareholders over production growth.

Stocks Hitting Tank Bottoms?

The market was closely watching the Cushing data in EIA's weekly report as inventories at the delivery hub for the WTI futures contract could give it clues about where the U.S. benchmark is headed.

"[W]orries over hitting tank bottoms should continue to be constructive for WTI timespreads," Warren Patterson, Head of Commodities Strategy at ING, said on Thursday.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, commented:

"At this rate of decline Cushing could hit its operational floor within a few weeks. A stunning reversal from last year when the pandemic prompted a glut of crude oil so big that exhausted storage capacity briefly forced WTI below zero. Watch those WTI front end spreads."

HFI Research, an energy research service, noted that "It's not where we are today, it's where we are headed given the recent draw/builds. We see flat US crude storage through refinery maintenance season before draws resume into year-end."

"Storage at Cushing alone has the potential to really rally the market to the moon," Bob Yawger, director of energy futures at Mizuho, told Reuters.

Low Cushing Inventories Support WTI

Stocks at Cushing at a three-year low have resulted in a narrowing of the discount of the WTI Crude prices to Brent Crude prices. As of early Thursday, WTI Crude traded at a discount of $1.67 a barrel to Brent Crude with prices down, mostly due to Iran saying that nuclear talks would resume by the end of November. Prices were also weighed down by the inventory build of 4.3 million barrels in U.S. commercial crude stocks. In fact, the dip in Cushing stocks was the only bullish point in EIA's weekly report for the week to October 22.

Earlier in October, the WTI to Brent discount was more than $4 per barrel. The spread is now at the narrowest it has been in just over a year, since September 2020.

The WTI futures curve points to high short-term demand as the backwardation in the one-year time spread is now higher than $10 a barrel.

The WTI December 2021 contract traded at a premium of over $10.30 per barrel to the December 2022 contract early on Thursday, suggesting inventories at Cushing could stay at low levels for months as storing oil is uneconomical in such a steep premium for nearer-dated crude.

Earlier this week, the premium of the WTI December 2021 contract to the December 2022 futures contract hit a high of $12.48 per barrel. This was the largest such premium since at least 2014, as per Refinitiv Eikon data cited by Reuters.

By Tsvetana Paraskova for