Extract from crude oil:
We estimate that the rise in stocks at Cushing leaves the hub on track to build by 5.2 mb over the month to hit 30.7 mb of total stocks by end-October. While this has been long expected by us and most in the market, as the builds actually materialised, the entire WTI futures curve has flipped into contango as of 18 October with the front spread (November-December) closing at -$0.19 yesterday (23 October). While we expected WTI to flip into contango, the move was a bit sooner and sharper than we thought. WTI has flirted with contango a few times in 2018, though the weakest M1-M2 price has been -$0.11, seen on 21 May after a 9 mb build over the previous 10 weeks with stocks at 35.1 mb. The last time we saw a contango of 20 cents, back in November 2017, was when Cushing stocks were at 60 mb, but then WTI moved into backwardation by January 2018 as stocks headed lower. Further back, the last time we moved into contango on a lasting basis was back in November 2014, when stocks rose by 10.5 mb between end-October and end-December following builds which began in July, albeit modest, from 17.9 mb in July 2014 to 21.4 mb in October 2014.
This month will be the third consecutive month of builds at Cushing, with a projected increase of 7.6 mb over that timeframe to 30.7 mb. While this is similar to levels seen towards the end of 2014, on a comparable basis, due to higher tank bottoms (as plenty of new tanks have been added), we would have expected stocks to rise above at least 35 mb before a sustained contango move emerged. The current move has been driven by a number of factors. Some are known, such as record refinery works in PADD 2 including some Cushing-area refineries, but also due to some unknown developments surrounding pipes both in and out of the hub. The Seaway Twin pipeline was originally expected to add DRA and flow 0.1 mb/d higher starting in September but has since been pushed back to October and has become a slow ramp-up through year-end. Adding to this uncertainty was the Sunrise expansion and its knock-on effects (both direct and indirect) on Cushing flows (see E-mail alert: EPIC success or failure: Permian bottleneck may get alleviated earlier in 2019, 13 September 2018). Some rumours are that the pipeline has already begun to flow, but it is more likely that linefill is now occurring and helping push Permian differentials substantially higher in recent weeks. We expected that flows will begin from 1 November. That said, flows on both Basin pipeline ex-Wichita Falls and Centurion ex-Texas are seeing higher flows into Cushing, suggesting that some barrels are flowing on Sunrise II into Wichita Falls from Colorado City, so perhaps the line has begun a few days ahead of schedule.
Extract from oil products:
US gasoline stocks fell by 4.8 mb w/w to 229.3 mb, with significant draws of 2.3 mb and 1.9 mb in PADDs 1 and 2 respectively. Total US gasoline stocks remain 12.5 mb over levels seen in 2017 at this time, with PADD 1 accounting for 10.8 mb of the y/y surplus. PADD 1 imports of motor gasoline blending components fell by 60 thousand b/d w/w to 0.24 mb/d, contributing to the w/w decrease in stocks. USEC gasoline continues to be pulled into PADD 2 as do PADD 3 supplies. A significant maintenance programme in PADD 2, along with weak gasoline prices in the USGC are pushing gasoline into PADD 2. Weak USGC gasoline prices have been keeping the arbitrage for the USGC to USAC at profitable levels, allowing valuations of Line 1 space along the Colonial pipeline to climb. Weak FCC margins, lower gasoline prices due to RVP transition and seasonally weaker demand should continue to put downward pressure on VGO prices. US regular gasoline prices were 36 cents higher y/y at $2.84 per gallon for the week to 22 October.