Oklahoma oil producers are receiving a price closer to the international rate as the country's pipeline infrastructure catches up with boosted domestic supplies.
The shale oil boom that has swept across the country over the past five years has ramped up domestic oil production, cut into imports and moved the country closer to energy independence than it has been in nearly half a century.
But the growth happened faster than the country's pipeline infrastructure could handle.
As a result, hundreds of new storage tanks have been built in Cushing to hold oil for up to months at a time as it waited in line to move through pipes to refineries along the Gulf Coast and throughout the country.
West Texas Intermediate crude — the benchmark for domestic oil — is priced at Cushing. The glut over the past three years has led domestic oil to be discounted by up to $30 a barrel compared to the international Brent Crude price.
The price spread narrowed to $4.30 Tuesday, the lowest point in at least two and a half years.
The trend has provided a boost for domestic oil producers, said Jeff Hume, vice chairman of strategic growth initiatives at Oklahoma City-based Continental Resources Inc.
“It gives us a much better market,” Hume said. “We're starting to regain our historic position as being one of the strongest markets.”
WTI oil in many cases is preferred to Brent because it contains less sulfur and is lighter and easier to refine.
Before 2011, Brent and WTI prices tracked closely, with Brent prices typically trading at a slight discount to the domestic crude, according to the U.S. Energy Information Administration.
The trend is returning largely because infrastructure has caught up, allowing oil to flow more easily to refiners throughout the country.
In recent months the Longhorn Pipeline and Permian Express pipeline have been completed. Both lines move oil directly from west Texas to the Houston area, bypassing Cushing altogether. At the same time, BP PLC has expanded a refinery near Chicago, drawing additional oil north from Cushing.
Besides pipelines, companies also increasingly are using trains to move oil from the middle of the country to refineries on the east and west coasts.
“Rail is reaching markets that have not been reached by pipeline,” Hume said. “Now I don't think those markets want to go back to foreign oil if they can buy domestic.”
While the new pipelines and rail routes have more easily moved domestic oil throughout the country, they also have allowed that oil to displace foreign oil. The United States is the largest importer of Brent oil, but the country's oil imports have been cut in half over the past three years.
The decreased demand for foreign oil has caused the price of Brent to slip, further narrowing the gap between domestic and foreign oil prices.
Not over yet
The oil price spread likely will continue to fluctuate as new pipelines are completed into and out of Cushing over the next few years, Hume said.
“There are quite a few projects in the mill,” Hume said. “In the next two or three years, there will be a lot of changes, but the key is the logjam has finally been broken. That is good for our economy.”
While the price spread may fluctuate, it ultimately will be determined by supply and demand, the EIA said in a statement last week.
“The future of the Brent-WTI price spread will be determined, in part, by the balance between future growth in U.S. crude production and the capacity of crude oil infrastructure to move that crude to U.S. refiners,” the administration said.
Known as the “pipeline crossroads of the world,” Cushing has been a critical oil hub for most of its history. The new pipelines likely will change the community's role, but not its importance to the industry, Hume said.
“There will still be a lot of oil moving through Cushing. The key is that it will be moving through, not just being stored there,” he said. “Cushing will remain a very valuable asset for Oklahoma and for our economy.”
Brent Thompson, executive director for the Cushing Chamber of Commerce agreed that Cushing will remain essential to the industry.
“At first blush, I don't see much of a change. Companies will still have to bring oil in and store it for some time for blending and other processes,” Thompson said. “We're going to store oil for maybe a shorter point of time, but we will still store and disperse large volumes of oil. That's been our stock and trade all along.”
The industry is still a strong job creator throughout Cushing, he said.
“There's still a lot of activity here,” he said. “We're hearing from the folks in the industry that we're probably going to see it for at least another five years. This could be one of the longest upticks in the energy industry.”
It gives us a much better market. We're starting to regain our historic position as being one of the strongest markets.”
Vice chairman of