Crude in Cushing is always big business.
The reasons why are as complex as the involvement of speculators in a global oil market, weather and economics. The factors revolve around crude oil — a substance that comes and goes unseen, at the pace of a brisk walk — flowing through more than two dozen underground pipes that remain hidden inside steel tanks.
Since mid-July, crude oil’s price has plummeted to half its July peak — closing below $70 on the New York Mercantile Exchange and down 50 percent. In Cushing and oil depots around the U.S., storage levels remain low as oil traders obsess about prices and inventory.
Since Hurricanes Gustav and Ike smacked the Gulf Coast, doing millions of dollars in damage, oil companies and refiners have worked feverishly to avoid another price spike that would send the economy into an even deeper tailspin.
Yet, in the Payne County community of 8,371, there is a building boom. Companies are building steel oil storage tanks southeast of the city at an amazing pace. Eight years ago, the inventory was 30 million barrels. Today it has grown past 40 million and will be closer to 50 million by late 2010, said Robert Felts, Cushing Economic Development executive director.
The tanks, on the outskirts of town, stretch to the horizon and cover more than nine square miles. The biggest hold 575,000 barrels — the amount of oil carried by a supertanker.
“They keep building because people keep investing in commodities,” Felts said.
In Cushing, most storage tanks are owned by eight entities: oil giant BP PLC and energy-transport and logistics firms Enbridge Energy Partners (an affiliate of Canada’s Enbridge Inc.), Plains All American Pipeline LP, SemGroup Energy Partners, Sunoco Oil, Teppco, ConocoPhillips and Centurian.
The Cushing tank-building boom has been hot and heavy for several years. Plains All American Pipeline has tripled its storage capacity since 2004.
“In the last five years, there has been $500 million in capital improvements by the pipeline companies to their infrastructure,” Felts said.
Today, tanks are half-empty because producers are straining to keep up with demand. Investment banks, financial firms and oil companies played a part in driving up prices by betting prices would keep rising. Once prices topped $120, some, like SemGroup LP, started betting the price would come down. Sadly, SemGroup got caught short in July and was forced to declare bankruptcy. Whether it was because of SemGroup’s demise, or the credit crunch sparked by the subprime mortgage fiasco, or just bad timing, prices started sinking just a couple of weeks later, and now everyone wonders where the bottom will be.
Cushing sits on Oklahoma 33. It’s home to a high school, a middle school, five elementary schools, a prison with 1,000 inmates and two taverns — the Buckhorn and Marietta’s. Downtown, the movie theater near City Hall sells tickets for $1.50, $2 on weekends.
It is not on a major interstate or railroad, but it sits on one of the world’s prime oil junctions because, 93 years ago, it was the railhead when Cushing’s oil boom began, said Holly Techenor, executive director of the Cushing Chamber of Commerce. The field was closer to Drumright, but in 1915, Drumright did not exist. The railroads brought the materials, supplies and men to Cushing, and then everything was hauled by wagon to the east.
“They had tent cities that stretched on and on,” Felts said.
At its peak, 710 wells produced 72 million barrels of oil annually. As a comparison, today, 80,000 active wells in the state produce about 61 million barrels annually. Oil was produced so fast, workers dug ponds until some entrepreneurs built a pipeline to the Cushing railhead to transport it out of state.
“That’s how we got into the storage business,” he said.
Wildcatters sucked the wells dry by 1940. At least two refineries operated in Cushing, and as the oil fields were depleted production and refining became less important. What was left was a maze of pipelines and tanks. Cushing’s global position as a oil crossroads was cemented in 1983 when the New York Mercantile Exchange, or Nymex, designated it as the official delivery point for its new futures contract for the grade preferred by gasoline refiners — light, sweet crude. Today crude oil storage at the Cushing hub is about 10 percent of the total crude oil storage capacity in the U.S.
This Nymex price now serves as a global benchmark. In the last decade Cushing has become an important way station for heavier Canadian crude.
A year ago, conditions in the oil market gave oil companies and speculators a financial incentive to sock away oil in storage tanks for sale later. Then, almost overnight, it became more lucrative to sell oil immediately, and in short order, the cushion of stored oil shrank.
There are 30 oil companies operating in town. Cushing has a diverse economy. For decades cotton dominated, and agriculture is still important, Felts said. The largest employer is the Cushing Regional Hospital with about 275 full-time employees. The Cimarron Correctional Center employs more than 200 peoples at the facility south of town.
Tank building created a strain on housing, Tichenor said.
“That has been a problem, trying to find housing for hundreds of workers,” she said.
Investing in crude oil is complicated — a lot more complex than trading stocks, bonds or purchasing gold coins from Don at 31st and Yale.
Institutional investors don’t actually own crude. To bet on it, they invest in oil futures — agreements to buy or sell oil at a set date in the future, said Chris Berg, director of sales and customer service at Chicago-based Fundamental Analytics. They usually unwind the contracts before the oil-delivery date arrives, eventually taking their profits or losses without actually handling the oil. If they leave the contracts in place, oil must be delivered to a designated delivery point.
Cushing is the main such point in the U.S.
The price of oil for future delivery isn’t the same as the price for immediate delivery. When traders figure supplies might run low, oil delivered in the future can become significantly more expensive than oil purchased on the spot market for delivery right away. Until recently, such price differentials gave oil companies and trading firms alike an incentive to buy oil and store it in tanks in Cushing and elsewhere.
Crude oil inventories in Cushing peaked at 21.8 million barrels in June and now sit around 14 million barrels, Berg said. That is down 29 percent from a year ago. Yet, inventories remain just a little under the five-year average.
In that regard, Cushing reflects the market.
A year ago, tank owners and companies that leased storage turned sizable profits simply by sitting on tanks of oil. They would buy oil for immediate delivery and stick it in their tanks, then sell contracts for future delivery at a higher price. When delivery dates neared, they closed out existing contracts and sold new ones for future delivery of the same oil. The oil sat ?≠— never budged. Today, the credit crunch has made it expensive to hold oil. Yet, the market is near five-year averages, Berg said.
“The trend is the same as it has been over the last couple of years,” Berg said. “The trend is actually near the five-year average.”
Traders agree it is not profitable to store oil for a later date.
Crude in Cushing is always big business.