Must-know: What's up with crude oil prices? (Part 3 of 4)
Cushing crude oil inventories
Crude supplies at Cushing, Oklahoma—where West Texas Intermediate (or WTI) is priced—saw an addition of 1.7 million barrels in the week ending August 15. Rising inventories at Cushing can pressure WTI lower and vice versa.
Inventories have now increased at Cushing for the third week in a row because of the shutdown of CVR Refining’s 115,000 barrel per day Coffeyville, Kansas refinery. CVR draws its supplies from Cushing.
CVR is gearing up to resume operations after a three-week shutdown. A fire on July 29 had put the plant out of commission.
Considering CVR’s restart, Cushing’s inventories could continue their declining trend. This has been the trend for most of the year.
This would be bullish for WTI prices because inventories already stand near six-year lows. As a result, stronger crude price would be positive for oil producers like Pioneer Natural Resources (PXD), Whiting Petroleum (WLL), and EOG Resources (EOG).
Also, oil producer heavy exchange-traded funds (or ETFs)—like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares U.S. Energy ETF (IYE)—would gain if crude prices were pushed up by declining Cushing inventories.
Why Cushing inventories have been on a declining trend
The drop in Cushing inventories in the past few months is a result of expanded pipeline takeaway capacity and unusually high refinery runs this year.
New infrastructure has allowed Cushing crude more movement. The new infrastructure includes TransCanada’s Keystone Pipeline, Sunoco Logistics’ Permian Express Pipeline, Magellan Midstream Partners’ Longhorn Pipeline, and the Cushing’s Marketlink Pipeline. As a result of the new infrastructure, the flows from Cushing to the Gulf Coast are no longer restricted.
There are also sustained high crude oil runs at refineries in the Midwest and the Gulf Coast. The refineries are receiving supplies from Cushing. This has also caused a decline in Cushing’s supplies.
Cushing’s levels are crucial
Investors must keep an eye on Cushing inventories because they can directly affect WTI prices. This also impacts oil producer company profitability and stock prices.
If the declining trend in Cushing inventories were reversed substantially again—to higher levels—this could pressure WTI crude prices even lower.
On the other hand, a continued declining trend could provide some support for WTI.
Browse this series on Market Realist:
- Part 1 - Must-know: Why crude oil prices have been falling lately
- Part 2 - Why the latest EIA inventory data confused crude oil prices
- Part 4 - Must-know: Why the WTI-Brent spread is widening
- Sectors & Industries
- crude oil prices