Bye, bye Cushing syndrome (possibly) | FT Alphaville

Bye, bye Cushing syndrome (possibly)

By now, anyone following oil markets will be familiar with Cushing syndrome. The one-way flow problem which affects the Cushing delivery point for Nymex WTI futures in Oklahoma preventing oil that’s gathered there to travel to alternative domestic or sea-borne markets where demand is higher.

The dynamics have resulted in an almost permanent discount of WTI crude to sea-borne Brent crude for nearly a year now.

But possibly not for much longer.

As JBC Energy reports on Wednesday:

Turning to Cushing Oklahoma, the delivery point of the Nymex WTI futures contract, pipeline firms Enterprise Product Partners and Energy Transfer Partners have teamed up to build a pipeline system that will carry crude from landlocked storage in Oklahoma to refineries on the US Gulf Coast. The system should be finished by 2012 and include a 400,000 b/d pipeline from Cushing to Houston as well as 500,000 barrels of additional storage capacity at the ending point of the pipeline.

The glut of crude at Cushing has brought benchmark WTI to record discounts to rival Brent. A fast-track construction of a 400,000 b/d pipeline would substantially ease the pressure on WTI, way ahead of current market consensus of about 2-3 years (based on Magellan, Keystone XL). However, it will be interesting to see how much resistance the two companies will face in the approval process, given strong interest of some market participants to extend the current situation.

Of course, pipelines are not the only way to get landlocked crude out of Cushing. Rail operators are also reportedly clambering to exploit the Cushing dislocations, with some even investing in additional services to the coast to take advantage of the current problems, which they consider long lasting.

One operator, US Development Group, opened a rail terminal in St. James Louisiana last November and is already handling some 60,000 barrels per day of crude on the route out of Cushing, according to Reuters.

The US Development line is potentially even responsible for the following spike in flows from the US Midwest (Padd 2) into the US Gulf (Padd 3) since the fourth quarter of 2010, as reflected via the following chart from Olivier Jakob at Petromatrix:

Point is, if a large enough arbitrage exists, chances are someone somewhere will figure out how to take it — even if it involves some hefty investment in physical infrastructure.

Related links:
WTI’s upcoming ‘Keystone’ problem – FT Alphaville
Correlation trading and the WTI-Brent spread – FT Alphaville
‘WTI about as useful as a chocolate oven-glove’ – FT Alphaville
Oil returns to U.S rails to avoid mammoth Midwest glut – Reuters