Latest / The Gathering Line / Oil Bottlenecks: Cushing Draws, Rail Jams, and Tight Physical Markets

Transcript

Oil Bottlenecks: Cushing Draws, Rail Jams, and Tight Physical Markets · The Gathering Line

• 0:00
  You know, if you spent any time watching physical oil markets lately,
• 0:04
  you have probably noticed that things are getting pretty wild out there.
• 0:09
  According to the latest Oil Market Report from the International Energy Agency,
• 0:13
  global oil inventories plunged by a massive ninety five million barrels in a single
• 0:19
  month.
• 0:20
  That is ninety five million barrels gone in August alone.
• 0:25
  And that supply squeeze pushed Brent crude prices surging right past one hundred and
• 0:30
  five dollars per barrel.
• 0:32
  Suddenly, refiners in the Atlantic Basin are scrambling, bidding up every physical
• 0:37
  North American barrel they can get their hands on.
• 0:40
  And it does not stop overseas.
• 0:42
  If you look at the U.S.
• 0:43
  Energy Information Administration's Weekly Petroleum Status Report,
• 0:47
  their updated stock summary showed a surprise commercial crude draw of three point
• 0:51
  two million barrels.
• 0:53
  Down in Cushing, Oklahoma, which is the main pricing point for U.S.
• 0:57
  crude, inventories fell below twenty two million barrels.
• 1:01
  That is a really tight buffer, and it drove prompt West Texas Intermediate spreads
• 1:06
  into steep backwardation.
• 1:09
  At the same time, up in Canada, Western Canadian Select differentials widened out to
• 1:13
  fifteen dollars and fifty cents under WTI.
• 1:17
  Why?
• 1:18
  Because seasonal maintenance in the Alberta oil sands choked off incoming diluent
• 1:22
  imports, leaving heavy crude stranded.
• 1:26
  Meanwhile, out in North Dakota, Bakken production is holding strong at around one
• 1:30
  point two million barrels per day.
• 1:33
  But with main pipelines running completely full, regional producers are getting
• 1:37
  pushed back into rail transloading hubs to move those extra physical barrels.
• 1:42
  It really reminds me of talking with old commodity trading veterans who remember the
• 1:46
  sudden market pivots of past decades.
• 1:49
  When Cushing stocks drain overnight and an overseas crisis strikes,
• 1:53
  midstream operators do not have six months to wait on pipeline approvals.
• 1:57
  They have to shift from long term pipe storage strategies to loading spot rail cars
• 2:02
  in a matter of hours.
• 2:05
  It is fast, it is messy, and it completely reshuffles regional trade flows.
• 2:10
  That brings us right to the regional bottleneck hubs, starting with Guernsey,
• 2:14
  Wyoming.
• 2:16
  Guernsey crude differentials recently strengthened to seventy five cents over
• 2:20
  Cushing.
• 2:21
  Industry analysis from East Daley Analytics points out that the Pony Express
• 2:26
  Pipeline is operating at one hundred percent utilization, pulling incremental crude
• 2:31
  from both the Bakken and the Powder River Basin straight south.
• 2:35
  But here is where the plumbing gets tricky.
• 2:38
  To get crude from Guernsey down to the Saddlehorn Pipeline,
• 2:41
  it has to pass through the Cheyenne and Cowboy pipeline connectors.
• 2:45
  Cheyenne can handle one hundred and twenty thousand barrels per day,
• 2:49
  but Cowboy Pipeline is stuck at a bottleneck capacity of ninety five thousand
• 2:53
  barrels per day.
• 2:54
  Plains is actively working on expanding Cowboy to one hundred and twenty five
• 2:58
  thousand barrels a day, but until that expansion is finished,
• 3:02
  physical barrels are trapped behind that restriction.
• 3:05
  This pipe friction comes right as active drilling in the Powder River Basin from
• 3:09
  operators like Anschutz and EOG is piling new production into Guernsey.
• 3:14
  So producers are forced to do the hard netback math, comparing pipeline transit
• 3:19
  against moving barrels by rail straight to the Midcontinent or down to the Gulf
• 3:23
  Coast.
• 3:24
  And then, of course, there is Utah's Uinta Basin waxy crude.
• 3:28
  This oil is super unique.
• 3:30
  It turns solid like shoe polish at room temperature, but refiners on the Gulf Coast
• 3:35
  absolutely love it for their fluid catalytic crackers because it has almost zero
• 3:39
  sulfur and yields fantastic product expansion.
• 3:43
  In fact, according to trade reports, Uinta waxy crude has been fetching a premium of
• 3:47
  around three dollars per barrel over WTI, even as nearby Salt Lake City refineries
• 3:53
  ramp back up to ninety two percent capacity following fall maintenance.
• 3:57
  The long term plan for Uinta crude was the proposed eighty five mile Uinta Basin
• 4:01
  Railway project, which carried one hundred and thirty thousand barrels per day of
• 4:05
  take or pay commitments.
• 4:07
  But with that rail line frozen in ongoing federal court litigation,
• 4:11
  producers cannot rely on new tracks anytime soon.
• 4:15
  Instead, they are sticking with the current playbook, using specialized heated and
• 4:19
  insulated coiled railcars to keep the wax liquid all the way down to the Gulf Coast.
• 4:24
  It just goes to show you, when market demand is strong enough,
• 4:27
  energy infrastructure always finds a way to move the barrel.