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Pipeline crunch at Cushing, Okla., could hit within months, Barclays says

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Pipeline crunch at Cushing, Okla., could hit within months, Barclays says

A shortfall in pipeline capacity from the Permian Basin to the Gulf Coast is already causing problems for oil producers in West Texas, but a bigger problem is looming: a potential bottleneck at the major hub in Cushing, Okla., that could widen the price differential between West Texas Intermediate and Brent crude.

New research from Barclays predicted that the U.S. oil market "could face a new shock" in as little as three to five months as production across the country grows at a rate between 15,000 barrels per month and 20,000 bbl/month. The production surge could be more than the Cushing hub is prepared to handle, "essentially wiping out any surplus takeaway capacity from higher refining runs," Barclays said.

According to data from the U.S. Energy Information Administration, Cushing crude oil inventories have jumped by 8 MMbbl since the first week of March.

That rise in inventories is a red flag, Barclays said. "Given the market has been in backwardation, there is no financial incentive to store oil," the firm said. "We therefore believe the recent inventory builds signal that outgoing Cushing pipelines have been full."

The situation could become more serious if production trends continue. Between February 2017 and February 2018, Oklahoma and Colorado added 20,000 bbl/d of production to the supply equation. Such additions alone could wipe out Cushing's extra capacity, but Barclays also anticipates an increase in Canadian oil imports that could reach more than 100,000 bbl/d this summer.

"As a result, we believe Cushing will remain bottlenecked in the coming months and that inventories will continue to build," Barclays said. The firm estimated inventories at the hub could reach 60 MMbbl as early as September or October. Full capacity is estimated to be approximately 80 MMbbl, and unlike the Permian, there are no new pipeline projects on the drawing board for hub.

Such a logjam for crude would affect not only U.S. markets, but the price differential between West Texas Intermediate crude and Brent crude. Barclays said the differential could "snap violently" when Cushing inventories reach 60 MMbbl, pushing the margin to $9/bbl or $10/bbl from the current spread of approximately $7/bbl.