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US oil market is deformed

UNITED STATES (OBSERVATORY) – Houston is rapidly becoming a new center of influence on the oil market, and Cushing is losing its relevance for this industry.

Cushing stops responding not only to the conservation of oil reserves in this industry, but also to the goals of collecting the sector’s data. According to Reuters, “it was recognized in the early 1920s, when tankers appeared to transport oil from Oklahoma and Texas to major megacities and oil refineries in the Midwest.” “In 1983, Cushing became the delivery point for newly launched futures contracts for WTI CLc1,” Reuters reports.

For many years, the volume of Cushing’s oil reserves was the main indicator used by companies, traders or legal persons who dealt with commodities, not to mention those who actively traded them on a daily basis. The volume of Cushing’s reserves was once a key indicator of oil supplies to the United States.

Decades ago, Cushing was considered a fairly simple way of measuring the volume of oil supplies, since the US did not export oil, but rather imported it. So there was the idea of ​​creating a center, the data of which can be referenced when assessing the volume of the US proposal. This can be used by traders and those who work in this industry to help determine the price of oil futures.

The market for trading in oil futures has developed, and methods have also been developed to collect data on oil reserves. It seems that the role of reserves in Cushing is beginning to decline.

Reserves in tanks can soon drop to zero, even when oil production in the US will hit a new record of 10.4 million barrels a day.

Oil reserves in Cushing fell earlier for various reasons, seasonal or market. But this time the market does not lack oil. In fact, production in the US puts pressure on pipelines and storage tanks.

The declining volumes in Cushing represent a constant process of change: Cushing loses the position of the largest influence center on the American oil market and the leading barometer of future demand, supply and prices.

In recent years, the industry has changed. At present, oil exports play the same significant role as imports. Consequently, infrastructure needs have changed significantly.

The most obvious changes in infrastructure naturally make one focus on cities such as Houston, the best indicator of the activity of the oil market, directed both in the US and from them.

To get spot prices, traders need to have a complete picture of the modern, much more dynamic situation with oil reserves, compared to the situation that was noted several decades ago. And Houston is now an area in which most traders are concentrated and which can replace Cushing as the center of influence on the US oil market.

Manufacturers are increasingly being sent directly to seaports, such as Houston, from which ships transport oil to dozens of countries around the world. This reflects a serious transformation of global oil flows, as the US lifted a four-year ban on oil exports in late 2015. Some traders and buyers argue that a new center is needed that will reflect all this.

Despite the fact that the center of influence on the oil market is shifting from Cushing to Houston, this step is commensurable with the situation on the oil market, which has changed significantly over the past few decades. New pipelines are being constructed, which are expected to be launched within the next 2 years, as the country’s oil infrastructure continues to develop to meet the needs of both imports and exports.

However, it can not be said that Cushing has absolutely no future: it can simply be an offshore depository or act as a backup rather than a main warehouse. A spokesman for Magellan Midstream Partners, which owns about 12 million barrels in the Cushing storage facility, says Cushing will remain important because of its links to the Persian Gulf and the Midwest.

Cushing is also connected to a pipeline in the Gulf, 500 miles to the south, and may be a cheaper storage than what is available on the coast, Conner of SemGroup said.

And yet, Cushing is losing its relevance, at least as a major center of influence on the oil market. As the markets develop, methods of collecting important data by sectors are developed.