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The Cushing Catch 22
“The #1 commodity - the most prized commodity today - is storage, not oil” Daniel Yergin [yesterday]
May 5th: New Texas RRC proration date
May 11th: Oklahoma CC proration hearing
May 20th: Trading terminates on June WTI contract
June 10th: Next planned OPEC+ teleconference
Unless you were in a coma on Monday, you witnessed - with the rest of us - *the* historic price collapse of the May WTI futures contract.
A lack of storage took the blame:
“Crude storage space is scarcer around Cushing, Oklahoma, the delivery location for the NYMEX light sweet crude oil contract.”
“Crude stocks at Cushing have risen by 21.3MM bbls over the last 5x weeks and there is now just over 18MM bbls of unused tank space available in the area.” - Reuters
As bad as Monday was, storage in Cushing (the delivery location for the WTI contract) wasn’t actually, physically full.
What wasn’t full, was simply rented out.
What is - potentially - more problematic than this week’s parabolic price swing is the June contract settlement, in 4x weeks time.
At the current rate of inflow, storage in Cushing *will* be full in <4x weeks.
Right now, crude storage is scarcer in Cushing than much of the US.
Mechanically, this can become an issue…
Speculation aside, WTI futures / options are:
A benchmark in contracts; &
Used as hedges
In the event that Cushing is full (and prices there collapse), before the rest of the US, unintended consequences will appear.
For example - let’s say you have a three-way collar hedge, with a subfloor at $25, using WTI puts / calls.
In 4x weeks time, imagine a hypothetical situation where:
Your production is being sold for $25 / bbl locally,
But, WTI futures are trading at $15
That subfloor put would unexpectedly cost you $10 / bbl, even though you’re selling your production at - and not below - the subfloor put price.
Cushing aside, there’s host of other issues related to storage & shut-ins.
In the US, there are more wells producing <10 bbl/d than not.
Many of these wells are deep in the oil patch, near bottlenecks.
The sheer number of wells make quick shut-ins improbable
Logistically, it presents a challenge
And then, there’s uncertainty over whether wells producing <100 bbl/d can be turned back on, producing at their prior rates.
From an energy security / waste perspective, the optimal short-term solution would be shale operators shutting production - shale wells have fewer recovery issues w/ shut-ins - to ease storage shortages in Cushing, South Texas, et. al.
However, as is often with an “optimal” solution, there’s legal, political, and game theoretical conflicts.
These conflicts lead us to expect the unexpected - that a new, emergent order will appear from government, industry, or both.
Will the CME change the WTI delivery spec?
Will Texas & Oklahoma prorate production?
Will the storage market shut-in production?
We don’t know the form…
… but something’s gotta give -
Moving on from the WTI contract, a couple more notes on crude inventories -
“Total stocks of unrefined crude and products, excluding the strategic petroleum reserve, increased by a further 25.5MM bbls last week & have risen by a total of 109MM bbls in the last 5x weeks.”
“Last week’s inventory increase was the 3rd-largest since records began in ‘90. 4/6 of the largest weekly stock builds on record have occurred in the last 5x weeks”
And, from Goldman:
Most of the remaining / spare capacity in the US SPR is for sour crudes.
And since the US is renting out capacity to other nations, we’re looking at a situation where:
Australia is going to rent space from the US SPR
Australia is going to buy sour Mexican crude
And that Mexican oil will be stored in an American salt cavern…
In a world with negative crude prices, that isn’t that weird -
Oil & Gas law, summarized:
When prices are high, no one checks contracts
When prices are low, everyone sues
When prices go negative, the rules are rewritten
What happens to royalty owners & operators when prices go negative?
Consider this clause:
"It is further agreed that Lessor’s royalty shall never bear … any part of the costs or expenses of production, gathering, … or marketing of the oil or gas from the leased premises, nor any part of the costs of construction, operation or depreciation … or treating said oil or gas produced from the herein leased premises"
OK - so the mineral rights owner shouldn’t end up with the bill.
But what about the operator?
Produce - and bear costs - even if operations net negative;
Or, shut-in the well & pay a shut-in royalty (or even lose the lease)
We’ll call this the Cushing Catch-22.
On Wednesday, Oklahoma’s energy regulator tried to break the loop - allowing E&Ps to shut wells w/o losing leases.
Was it legal?
Can force majeure clauses be triggered?
We don’t know.
We do expect years of litigation to follow -
Brokers put limits on WTI & Brent futures
Mnuchin considers loans for the Oil & Gas industry
Harold “the height of hypocrisy” Hamm
GSO’s distressed credit business posted -30% return in Q1:
“The losses were driven in part by energy” - Bloomberg
And - of course - Michael Moore has a new film out, criticizing wind & solar…
Look, Hell already froze over - we’re just waiting for the flying pigs -
That’s it for this week - we’ll be back on Tuesday - Day 2 of the NFL Draft starts today at 7PM EST, we’ll be watching -