(Bloomberg) — Oil storage tanks at a key U.S. crude hub have emptied nearly to the bottom as a massive new pipeline in Canada diverts flows elsewhere, muddying market signals that traders have long relied on.
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Inventories in Cushing, Oklahoma, have been declining for the past four months and are now near the lowest level in a decade for this time of year. Market participants say the drawdown, which typically occurs when fuel demand increases during the driving season, was exacerbated this year as the expanded Trans Mountain pipeline shifts Canadian oil supplies to the country’s Pacific coast and away from the U.S. Gulf Coast.
The expanded pipeline has carried about 400,000 barrels of crude a day since it began operating in May, and Cushing’s tanks have lost nearly 13 million barrels of oil during that period. Flows of Canadian crude to the U.S. Gulf Coast have slowed to the point that a competing pipeline system owned by Enbridge Inc. has largely operated without the congestion it typically experiences during the U.S. summer driving season.
European demand for U.S. crude is also drawing barrels out of Cushing’s warehouses, traders said, particularly as buyers hunt for similar grades after supply disruptions in Libya.
“With Libyan risks, I tend to think storage will remain at minimal levels in the near term, and the market will make WTI too expensive to export,” said Scott Shelton, an energy specialist at TP ICAP Group Plc.
Continued declines in Cushing have helped shore up the price spread between the two nearest WTI futures contracts. The spread is hovering around $1 a barrel after hitting the highest levels in almost a month.
Movements in crude spreads are a closely watched indicator of supply-demand balances, and are currently signaling a shortage of barrels for immediate delivery despite concerns about a long-term oil supply glut.
Cushing’s current reserves of about 22.7 million barrels represent less than a third of the hub’s operating capacity of 78 million barrels. The rapid decline is fueling concerns that the hub’s ability to operate normally could be threatened. Pipeline operators at the storage hub did not immediately respond to requests for comment.
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