With growing inventories and capacity additions complicating seasonal average inventory comparisons, storage capacity utilization numbers take on greater significance. While capacity utilization increased from September to March, more recently that trend has been reversing. Weekly data indicate that Cushing inventories, since reaching a record high on April 8, have fallen about 4.9 million barrels to 37.0 million barrels as of July 1. While Cushing inventories are now slightly above their year-ago levels, other market factors equal, greater spare storage capacity implies lower marginal storage costs in the area, and therefore, potential relief to downward pressure on WTI. As evidence of easing pressures, the steep contango that was a hallmark of the WTI futures curve in January and February all but vanished, with the front-end of the WTI curve essentially flat in early June, even as near-month prices had returned to levels similar to those of the pre-Libyan crisis period. Despite a pullback in near-month price levels in mid- to late June, time spreads at the front-end of the curve have remained relatively stable.
The issues outlined above are not unique to Cushing. PADD II inventories, excluding those at Cushing, increased 7.2 million barrels (12.7%) from September to March, 4.9 million barrels more than the 5-year average build of 2.3 million barrels over that period. However, refinery and tank farm (excluding Cushing) crude oil storage capacity increased 6.3 million barrels (12.1%) over the same period. Thus, from a utilization standpoint, downward pressures on near term prices in PADD II would appear less intense than might be thought based solely on consideration of inventory levels.
Going forward, storage capacity utilization rates will continue to add context to reported inventory levels. Various trade press sources have reported that additional capacity expansions are planned for Cushing over the second half of 2011 and 2012, which, if realized, may continue to encourage inventory building at somewhat higher rates than suggested by seasonal averages. As such, shifting inventory/storage capacity relationships may have implications for relative crude oil prices or spreads, as well as differentials between the landlocked Cushing hub and competing import markets on the Gulf Coast.