NEW YORK - Dwindling fuel demand, with the United States mired in recession, has led to a record oil supply glut at the world's largest storage site -- a factor that could soon trigger another fall in crude prices.
Inventories at the storage hub at Cushing, Oklahoma -- the delivery point for U.S. crude futures -- have surged a whopping 139 percent to near the available capacity since early October, as sliding energy demand makes holding oil more profitable than refining it.
Analysts say that once the hub's tanks fill to the limit -- which at current rates could happen any time -- the scramble by suppliers to unload excess barrels could knock already depressed U.S. crude benchmark prices down further.
"Producers would have to offer massive discounts for prompt crude," said Nauman Barakat, senior vice president at Macquarie Futures USA in New York. "Prices might fall back to lows around $33 (a barrel)."
Crude for March delivery on the New York Mercantile Exchange was around $41 a barrel on Monday.
Traders profit at Cushing, where tanks dot the landscape midway between Tulsa and Oklahoma City, by storing oil and committing it for sale later. But some eager to squirrel away crude are now being turned away because Cushing tanks are so full, industry sources said.
Cushing's nominal storage capacity is 46.3 million barrels, according to public company filings and industry sources consulted by Reuters.
Only 80 percent to 85 percent of that is operable -- as little as 37 million barrels -- as some tank space is left empty for safety reasons or crude blending.
AWASH IN OIL
Cushing stocks rose by 2.4 percent to a record 34.3 million barrels on January 30, according to the U.S. Energy Information Administration. The stock build has helped cut U.S. oil futures prices by nearly 75 percent from a record $147 a barrel in July.
"Cushing has to be dog-gone close to overflowing," said John Duff, an analyst at the EIA in Washington. "If Cushing fills, chances are people will sell prompt crude at a discount and (futures) time spreads will be wider."
Few of the major players with storage tanks at Cushing have plans to expand capacity in the near future, and new tanks take 18 months to build, industry sources say.
Only SemGroup LP (SGLP.O) and Teppco LP (TPP.N), two U.S. midstream oil companies, plan to inaugurate new tanks this year, adding 6.1 million barrels of storage. Companies including Enbridge Inc (ENB.TO) and Plains All American Pipeline (PAA.N) have helped to add 10 million barrels in Cushing storage since late 2006.
Meanwhile, pipeline operators have focused on raising pumping capacity there. By the end of March, Enbridge will expand its Cushing-bound Spearhead line by 65,000 bpd to 190,000 bpd.
Scant storage also has prompted companies to store crude offshore in tanker ships. As much as 25 million barrels of crude, mostly from the North Sea, is believed to be floating in storage off the U.S. Gulf Coast, an industry source said.
U.S. refiners are buying less oil, but the region's crude producers haven't scaled back, and shutting down drilling rigs can be costly.
U.S. gasoline demand fell for the first time since 1991 last year. Refinery inputs of oil in the U.S. Midwest, which relies on Cushing supply, fell to 3.08 million barrels in the week to January 30, down 3.6 percent from a year earlier.
On Monday, New York Mercantile Exchange crude for March delivery was priced at more than $11, or 21 percent, less than barrels for July delivery.
In part, the higher prices for later-delivery months reflect traders' expectations that OPEC production cuts and rising U.S. gasoline demand will, by summertime, push prices higher.
In January, OPEC began implementing cuts of 4.2 million barrels per day from its September production.
In the past, when later-month prices were much higher than near-month prices -- a situation known in commodity trading as contango -- the scenario has often reversed quickly. One contango ended in 2007, after refinery problems in the U.S. Midwest were resolved, leading to a surge in refinery buying.
Inventories at the storage hub at Cushing, Oklahoma -- the delivery point for U.S. crude futures -- have surged a whopping 139 percent to near the available capacity since early October, as sliding energy demand makes holding oil more profitable than refining it.
Analysts say that once the hub's tanks fill to the limit -- which at current rates could happen any time -- the scramble by suppliers to unload excess barrels could knock already depressed U.S. crude benchmark prices down further.
"Producers would have to offer massive discounts for prompt crude," said Nauman Barakat, senior vice president at Macquarie Futures USA in New York. "Prices might fall back to lows around $33 (a barrel)."
Crude for March delivery on the New York Mercantile Exchange was around $41 a barrel on Monday.
Traders profit at Cushing, where tanks dot the landscape midway between Tulsa and Oklahoma City, by storing oil and committing it for sale later. But some eager to squirrel away crude are now being turned away because Cushing tanks are so full, industry sources said.
Cushing's nominal storage capacity is 46.3 million barrels, according to public company filings and industry sources consulted by Reuters.
Only 80 percent to 85 percent of that is operable -- as little as 37 million barrels -- as some tank space is left empty for safety reasons or crude blending.
AWASH IN OIL
Cushing stocks rose by 2.4 percent to a record 34.3 million barrels on January 30, according to the U.S. Energy Information Administration. The stock build has helped cut U.S. oil futures prices by nearly 75 percent from a record $147 a barrel in July.
"Cushing has to be dog-gone close to overflowing," said John Duff, an analyst at the EIA in Washington. "If Cushing fills, chances are people will sell prompt crude at a discount and (futures) time spreads will be wider."
Few of the major players with storage tanks at Cushing have plans to expand capacity in the near future, and new tanks take 18 months to build, industry sources say.
Only SemGroup LP (SGLP.O) and Teppco LP (TPP.N), two U.S. midstream oil companies, plan to inaugurate new tanks this year, adding 6.1 million barrels of storage. Companies including Enbridge Inc (ENB.TO) and Plains All American Pipeline (PAA.N) have helped to add 10 million barrels in Cushing storage since late 2006.
Meanwhile, pipeline operators have focused on raising pumping capacity there. By the end of March, Enbridge will expand its Cushing-bound Spearhead line by 65,000 bpd to 190,000 bpd.
Scant storage also has prompted companies to store crude offshore in tanker ships. As much as 25 million barrels of crude, mostly from the North Sea, is believed to be floating in storage off the U.S. Gulf Coast, an industry source said.
U.S. refiners are buying less oil, but the region's crude producers haven't scaled back, and shutting down drilling rigs can be costly.
U.S. gasoline demand fell for the first time since 1991 last year. Refinery inputs of oil in the U.S. Midwest, which relies on Cushing supply, fell to 3.08 million barrels in the week to January 30, down 3.6 percent from a year earlier.
On Monday, New York Mercantile Exchange crude for March delivery was priced at more than $11, or 21 percent, less than barrels for July delivery.
In part, the higher prices for later-delivery months reflect traders' expectations that OPEC production cuts and rising U.S. gasoline demand will, by summertime, push prices higher.
In January, OPEC began implementing cuts of 4.2 million barrels per day from its September production.
In the past, when later-month prices were much higher than near-month prices -- a situation known in commodity trading as contango -- the scenario has often reversed quickly. One contango ended in 2007, after refinery problems in the U.S. Midwest were resolved, leading to a surge in refinery buying.
