Tuesday 2 October 2012

The Oil Hub Where Traders Are Making Millions


Companies Mentioned

  • GS
    Goldman Sachs Group Inc/The
    • $117.57 USD
    • 0.71
    • 0.6%
  • CME
    CME Group Inc
    • $56.96 USD
    • -0.14
    • -0.25%
  • TRP
    TransCanada Corp
    • $45.47 USD
    • 0.01
    • 0.02%
  • DGI
    DigitalGlobe Inc
    • $20.99 USD
    • 0.21
    • 1.0%
  • PAA
    Plains All American Pipeline LP
    • $45.01 USD
    • 0.13
    • 0.29%
  • MS
    Morgan Stanley
    • $16.91 USD
    • 0.12
    • 0.74%
  • IHS
    IHS Inc
    • $97.3 USD
    • -0.10
    • -0.1%
  • BRK/A
    Berkshire Hathaway Inc
    • $133090.0 USD
    • 90.00
    • 0.07%
  • UNP
    Union Pacific Corp
    • $118.52 USD
    • -0.01
    • -0.01%
  • PSX
    Phillips 66
    • $46.66 USD
    • 0.10
    • 0.21%
  • STO
    Statoil ASA
    • $25.92 USD
    • 0.15
    • 0.58%
  • HES
    Hess Corp
    • $53.61 USD
    • -0.34
    • -0.63%
Market data is delayed at least 15 minutes.
Tugboat pilot Barry Meredith hauls barges of oil as big as football fields for a living. He calls his route “the loop,” which starts with him guiding his boat and two empty 300-foot barges into the Port of Catoosa, outside Tulsa, Okla. Meredith steers toward a cluster of seven storage tanks brimming with crude that’s been trucked in from wells in Oklahoma and Kansas.
Moving 43,000 barrels of oil from the tanks into the barges is a 12-hour process, and one mistake can mean disaster. “You get 4,000 barrels going through that hose every hour, and you let something ass up. … Man, it makes a big mess,” Meredith says in his Florida drawl, his face deeply tanned from 19 years on a tugboat. At dawn the next day he’ll leave for Mobile, Ala. The route of winding rivers is more than 1,300 miles long and takes about a week.
“It’s a haul, man,” says Meredith. “You leave here and go back out the Arkansas River. Then you hit the Mississippi and take it down to New Orleans and into some industrial locks. Once you’re through those, you scoot across Mississippi Sound and on over to Mobile Bay and into the Mobile harbor.” Next stop is a storage facility in Mobile leased by Hunt Oil. Meredith says Hunt will take this domestic crude and mix it with lower-grade oil from Venezuela. He’ll then barge the blend up to Hunt’s refinery in Tuscaloosa, where it’ll be turned into gasoline, diesel fuel, jet fuel, and asphalt. Meredith then will head back to Catoosa and start all over again.
These are 24/7 days for oil production in the U.S. North Dakota now produces more oil than Alaska—and more than Ecuador, too. Geologists estimate that Oklahoma still has 80 percent of its reserves in the ground. The majority of this oil is of the highest quality: light, sweet crude that’s low in sulphur, lighter than water, and cheaper to refine into gasoline than the heavier sour (high in sulphur) crude from Venezuela and the Canadian tar sands. Goldman Sachs (GS) predicts that by 2017 the U.S. will be the world’s biggest oil producer.
In one tank, 500,000-plus barrels of oilPhotograph by Daniel Shea for Bloomberg BusinessweekIn one tank, 500,000-plus barrels of oil
All this oil needs to get stored somewhere, and the largest facility in the country is 60 miles west of Catoosa in the small town of Cushing (pop. 7,890). Each day some 900,000 oil futures and options contracts are traded on the New York Mercantile Exchange (CME). The oil at Cushing is what’s bought and sold. The town’s hundreds of storage tanks are the country’s biggest bank vault of oil. And it’s getting bigger. In September 2008 there were fewer than 15 million barrels of oil parked there. Today there are 44 million, 16 million more than in January. And that’s a problem. Oil is flowing into Cushing faster than it’s getting piped out.
The giant pool of crude stuck in the middle of the country has done strange things to the oil market. The light, sweet crude that Meredith transports is priced against the domestic benchmark West Texas Intermediate. It’s so plentiful right now that for the past year it has traded at an average $95 a barrel, $16 below the price of its international equivalent, Brent crude. At its peak last October, the spread—the price differential between WTI and Brent—was $27. That’s the biggest gap in the history of those two oil contracts, which for most of the last 20 years have moved within $1 of each other. What’s helped push down the price of WTI? The fact that it’s stuck in Cushing. Oil that can’t be moved to where it needs to go quickly drops in price. The result has been one of the biggest arbitrage opportunities in recent memory: Buy oil low in Cushing, and sell it high—just under the price of Brent—to refineries along the Gulf Coast. The trouble is getting it there.
The race is on to get the oil out of Cushing. Pipeline companies are pushing to build new pipes and, in some cases, reversing the flow of existing ones. For 17 years, the 500-mile-long Seaway Pipeline pumped imported crude from the Gulf Coast into Cushing. In May it was reversed, and now Seaway pumps 150,000 barrels a day south to the refiners on the Gulf Coast. TransCanada (TRP), based in Calgary, is spending $2.3 billion to extend its Keystone Pipeline south of Cushing. (Its Keystone XL pipeline still awaits approval.) When completed next year, it’ll move 700,000 barrels a day.
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