(Bloomberg) -- The biggest oil-storage hub in the US — a massive network of tank farms known as the “Pipeline Crossroads of the World” — is rapidly losing its primacy as a signal for domestic supply and demand.
For decades, traders watched inventory levels at Cushing, Oklahoma, to track US crude balances, but the US’s increasing integration into the global oil market is weakening the complex’s relevance. The US has been shipping growing volumes of crude abroad since Washington lifted an export ban in 2015, and earlier this year American oil was for the first time included in the calculation of Dated Brent, the world’s most important physical oil benchmark. Both of those factors are shifting traders’ attention to the country’s main export center on the Gulf Coast.
In perhaps the most vivid sign of Cushing’s fading importance, US oil futures are trading in a bearish structure that signals ample supplies, despite inventories at Cushing only just building back up after dwindling close to levels that threaten the tanks’ ability to operate normally.
“The US market is much more waterborne than in the past,” said Vikas Dwivedi, a global oil and gas strategist for Macquarie Group. “Cushing matters only at the tails — either very empty or very full — the middle 80% is probably not as impactful anymore.”
Even with a population barely topping 8,000, the town of Cushing has long played a central role in the US crude market, and it has remained a focal point for traders in recent decades as pipelines from the prolific Permian Basin shale fields of Texas and New Mexico — as well as conduits from Canada — converge on the site. The location, which has a working storage capacity of about 78 million barrels of oil, is also where the price of the Nymex contract for US benchmark West Texas Intermediate crude is set.
The hub’s declining importance means US oil futures may now flash signals about the crude market that only partially reflect the physical reality, making risk management and trading more challenging for market participants.
For example, US crude’s prompt spread this month flipped into a bearish structure known as contango — where near-term supplies trade at a discount to those for delivery farther into the future — for the first time since July. That happened despite inventories at Cushing that had shrunk below 22 million barrels, near the minimum operating levels for the site’s tanks, as recently as late last month.
The last time inventories at the storage depot were below that level, the prompt spread was in a bullish backwardated structure of more than $3 a barrel. The spread was at 33 cents in contango as of Monday, ahead of the December contract’s expiry. Trading in the spread can be choppy leading up to the expiry as traders square positions.
Cushing stockpiles rebounded to about 25 million barrels in the most recent US government report released Wednesday, still well below the 32 million-barrel average over the past year.
When West Texas Intermediate futures were introduced in 1983, the US largely supplied its own refineries to meet domestic fuel needs. About 3,000 contracts traded in the first month after the launch of WTI, and a year later, trading volume topped 100,000 contracts a month, according to CME Group data. Now, more than 500,000 contracts change hands on a typical day.
Crude exports from the US have surged since Washington lifted an export ban, and the country now routinely ships more than 4 million barrels a day to key markets in Europe and Asia.
To be sure, the benchmark US crude contract is still one of the most liquid commodities futures instruments and acts as a base against which other crude grades in different regions trade.
“Physical crude oil in the Gulf Coast, and the rest of North America, trades as a differential to CME Group’s Light Sweet Crude Oil at Cushing, which aligns the significance of the Gulf Coast with the importance of the WTI futures contract,” a spokesperson for CME said in a statement.
At the same time, open interest in the the Argus Houston contract versus WTI, known as HTT, has surged 120% since the start of 2023, with more than 70% of new entities trading the Argus basis contracts based outside the US.
As America’s role in global markets grows, it’s more likely that futures trading will more closely reflect supply and demand at the US Gulf Coast instead of solely inland at Cushing, traders and analysts said.
“Cushing is a transfer point for barrels from the Midwest and Canada to the US Gulf Coast and also a supplier for Cushing refiners,” said Scott Shelton, an energy specialist at TP ICAP Group Plc. “As long as there is enough supply for the Cushing refiner, stocks can be low and the curve could be relatively flat.”
--With assistance from David Marino.
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