Kansas Refinery Outage Upends Cushing Oil Supply Outlook

The announcement that a refinery in Kansas will be shut for weeks has upended concern that oil supplies at the main U.S. trading and storage hub will sink to minimal operating levels.

The plant in Coffeyville may remain idle for four weeks after a July 29 fire, CVR Refining LP Chief Executive Officer Jack Lipinski said today on an earnings call. Some units were projected to be open in 72 hours, IIR Energy, a Sugar Land, Texas, energy information provider, said yesterday.

The 115,000-barrel-a-day plant receives most of its crude from Cushing, Oklahoma, the delivery point for West Texas Intermediate crude futures traded in New York. Falling stockpiles at the hub have bolstered prices for the U.S. benchmark.

“The shutdown will have a noticeable impact on supply at Cushing,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Plunging Cushing supplies have been a major supportive factor for WTI. Inventory levels should start to reverse.”

Supplies at Cushing, Oklahoma, fell by 924,000 barrels to

17.9 million last week, the lowest level since October 2008, according an Energy Information Administration report yesterday. Stockpiles at the hub have dropped 56 percent this year as new pipeline capacity has sent oil to the Gulf Coast, home to about half of U.S. refining capacity.

Floating Roofs

Three companies with storage tanks in Cushing estimated minimum operating levels at anywhere from 8 percent to 20 percent of total capacity, according to interviews with Bloomberg in October. Cushing had 81 million barrels of total capacity in March, according to the EIA, so the companies’ ranges would make the estimated operational minimum supply level from 6.5 million to 16.2 million barrels.

Oil storage tanks typically have floating roofs that rest on top of the crude, so there is no space for explosive vapors to waft off the volatile liquid. If the level of crude gets too low, legs attached to the bottom of the roof will hit the ground, allowing the vapors to form.

WTI for September delivery tumbled $2.10, or 2.1 percent, to $98.17 a barrel on the New York Mercantile Exchange. Today’s settlement was the lowest since March 17. The U.S. benchmark climbed to $107.26 on June 20, the highest close since Sept. 18.

Control System

“There’s no doubt that traders were very long crude,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “As prices continued to fall stops were triggered, which added to the downward move.”

The July 29 fire at the Coffeyville refinery damaged fiber optics in the control system, forcing valve closings on units and preventing crews from operating equipment, according to a person familiar with operations.

CVR, which owns 1 million barrels of storage at Cushing and leases 3 million barrels of tanks, says Cushing supplies crude to Coffeyville and the Wynnewood refinery in Oklahoma.

New links are scheduled to open this quarter, bolstering supply at the hub. Tallgrass Energy Partners LP plans to complete the conversion of the Pony Express pipeline to carry crude to Cushing from Wyoming, while Enbridge Inc.’s Flanagan South will connect to the hub from Illinois. Pony Express will open with throughput of 230,000 barrels a day and Flanagan South will be able to move 600,000, the lines’ owners said.

U.S. refineries typically schedule maintenance programs for September and October when they transition from maximizing gasoline output to the production of winter fuels.

The receding supply concerns at Cushing narrowed the premium of September over October contracts to 85 cents a barrel from $1.23 yesterday on record volume.

“We’re anticipating that the Pony Express pipeline will be running in October, which will increase supply,” Lipow said. “We’ll soon be in the fall refinery maintenance season, which will reduce demand, so supplies are going to continue to rise.”

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