Bloomberg Businessweek
By Matthew Philips September 27, 2012
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.
Photograph by Daniel Shea for Bloomberg
BusinessweekIn one tank, 500,000-plus barrels of oil
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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 J anuary. 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.
Analysts quibble over how long this price spread between WTI and Brent will stay open; many thought it’d be
closed by now. According to the futures markets, the price of a barrel of WTI will still be $14 cheaper than Brent in
March 2013, a gap that’s about $4 smaller than it is right now.
Given the uncertainty, and just how unprecedented this window of opportunity is, oil-trading companies are trying to
find creative ways to move cheap oil out of Cushing by any means necessary, using barges like Meredith’s, fleets of
commandeered trucks, and trains, where they can find them. The companies that can pull it off can expect to make
money—a lot of it.
Driving down Cushing’s Main Street, you’d have little idea you were visiting the capital of the American oil
kingdom. Small, one-story businesses line the worn-out road: Mo Money Pawn, Andy’s Used Cars, the Steer Inn
Family Restaurant with an all-you-can-eat buffet. Cushing’s slogan offers a hint: “The Pipeline Crossroads of the
World” is emblazoned on two white pipes sticking out of the ground on either side of town. Those pipes, however,
are only props. Beneath Cushing and hidden from view is a vast network pulling oil in from all over North America,
from the Canadian tar sands 1,500 miles away to newly drilled wells just east of town.
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Photograph by Daniel Shea for Bloomberg
BusinessweekDowntown Cushing
From 300 feet above Cushing, clusters of crude oil storage tanks look like giant cupcakes surrounding the little
town—white frosted roofs atop round chocolate cakes. These are the oldest tanks, built in the 1920s when Cushing
was still flush with wells that produced almost 20 percent of all the oil in the U.S. As the town went from producing
its own oil to storing everyone else’s, the tanks grew. The old cupcake tanks, capable of holding 80,000 barrels, are
now dwarfed by ones that can hold 600,000 barrels. These new tanks are 57 feet tall and 271 feet in diameter—a
Boeing 747 could fit within the walls with room to spare. Hundreds dot the rolling pastures around Cushing, their
neat clusters interspersed by patches of bare earth and pieces of construction equipment erecting new ones.
Twice a week a small helicopter circles over Cushing’s tank farms on an oil industry spying mission. A photographer
sitting next to the pilot in the two-man cockpit snaps pictures of the tanks below to gauge how full they are. Most
tanks have floating roofs that move up and down inside their cylindrical walls depending on how much oil is inside.
The length of the shadows cast across these roofs indicates the amount of oil stored within (the longer the shadow,
the emptier the tank). Recently, photographers have started using infrared cameras to peer inside the tanks. The
difference in heat can often show where the oil line is.
The company funding this espionage is Genscape, a private energy intelligence firm based in Louisville. Genscape
also places electromagnetic monitors beneath the power lines running into the Cushing tank farms to measure their
power usage. This gives them an idea of how much oil is being pumped into and out of Cushing. Analysts then
crunch this data into weekly status reports that Genscape sells to major banks and hedge funds with large oil-trading
The companies that own the tanks aren’t happy about the surveillance. Some have trading operations and closely
guard their information about what goes on in Cushing. Eight-foot-tall barbed-wire fences surround their facilities.
Signs warn drivers that they’re on private property and are liable to be stopped and searched. High-definition
remote-control cameras mounted inside the complexes monitor every square foot. At times, armed guards are posted
at the gates.
But the companies can’t control the airspace. And while they may not like the choppers, most storage companies are
also Genscape clients. “They have a philosophy that while they may not like what we’re doing, they love to know
what their neighbor is up to,” says J ill Sampson, managing director of North American operations for Genscape.
Still, it’s a fraught relationship: “Let’s just say that on most days we are not their favorite people.” Demand for
information about what’s going on in Cushing is so high that a Colorado-based firm called DigitalGlobe (DGI) (in
partnership with Bloomberg LP, which owns Bloomberg Businessweek) has started flying one of its three satellites
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overhead twice a week to snap high-resolution pictures from space. They also do this over Libya. And Iran.
The photos don’t reveal the steady commotion of oil moving in and out beneath the placid oil tank roofs. Inside the
Plains All American Pipeline (PAA) tank farm, the atmosphere is like an efficient airport. Batches of oil arrive from
the field and get piped out to refineries all over the country. The 18.5 million-barrel tank complex is run by the
equivalent of an air traffic control center. Small teams of dispatchers gaze at banks of computers and flat-screen TVs
showing detailed schematics of the underground network of pipes. Valves are opened and shut with the click of a
mouse. Tank icons colored red or green indicate whether they’re being emptied or filled. Arrows show the direction
the oil is flowing.
Photograph by Daniel Shea for Bloomberg
BusinessweekThe Plains All American Pipeline system
Oil doesn’t just move in and out of the tank farms, it gets shuffled around inside them, too, from tank to tank. One of
the main ways oil traders make money at Cushing is by blending together the thousands of types of crude that show
up there, from light, sweet stuff that looks like Mountain Dew to heavy, sour goo that looks like molasses. A
Cushing tank farm is not only a storage hub but also a giant blender—there are rotating blades at the bottom of each
tank—mixing oil into an infinite number of specifications. A refinery making asphalt may want a heavier blend of
crude while one that creates jet fuel wants extra light and sweet.
Companies that lease space at Cushing (from banks to big integrated oil companies to small, private outfits) have
schedulers who move it around, serving up a variety of crude cocktails. “I’m like a crude bartender,” says Robert
Westover, a scheduler for the Swiss company Mercuria Energy Trading, the fourth-largest private oil-trading firm in
the world. Mercuria leases 2.5 million barrels of storage at Cushing from a company called Deeprock Energy
Resources and another 500,000 from a firm called Sem Group.
Refineries can be very particular about the kind of oil they’ll take. “These folks are picky,” says Walter Kahanek,
vice president of sales at 4K Fuel Supply, a Houston-based oil-trading firm. He’s been barging about 50,000 barrels a
month out of Catoosa. “If you don’t have the exact specification of what they want, then you’re just loping your
chicken taking it all the way down there.”
Every June, Cushing hosts a barbecue and bluegrass festival for the oil and pipeline industry. Each of the nine
storage tank companies pitches tents in a field outside of town and cooks up hundreds of pounds of barbecue and
brisket in custom-made grills designed to look like crude trailer trucks, storage tanks, derricks, and oil tankers. The
event draws people from all over the world, from banks such as Morgan Stanley (MS) to small trading outfits in
Houston and parts of Texas. Traders and schedulers who deal with each other on the phone get a chance to meet
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face-to-face over pulled pork and cold beer. Some snicker at Cushing’s size and reputation as a hot spot for meth
labs. (In J anuary the city considered a proposal to make landlords pay to clean up meth labs found on their
Photograph by Daniel Shea for Bloomberg
BusinessweekA picnic in town
In March, President Barack Obama visited Cushing to celebrate the increase in domestic oil production that
happened during his first term. He was not met with universal enthusiasm. Cushing is largely Republican and doesn’t
like sharing credit for the boom. “He had nothing to do with it,” Brent Thompson, head of the Cushing Chamber of
Commerce, says while sitting in a golf cart and waving people toward parking spaces for the barbecue festival. Still,
it was the first time a sitting president came to Cushing, underscoring the town’s growing importance.
More tanks are being built every day, and some estimate that by the end of the year, Cushing will have 80 million
barrels of storage capacity, 14 million barrels more than it had in September 2011. Those are likely to be used soon
after they’re built: No one in Cushing builds anything on spec. “The production picture has changed so dramatically,
so quickly, and so unexpectedly, the logistics haven’t caught up,” says Daniel Yergin, author of The Prize: The Epic
Quest for Oil, Money and Power and chairman of IHS Cambridge Energy Research (IHS).
Taking advantage of this logistics gap isn’t easy. You need trucks, drivers with hazmat licenses, storage tanks, and
access to a rail or a river terminal. These challenges have rewarded locals and foiled many traditional traders. Hedge
funds in New York have tried and failed to line up the necessary pieces. One New York-based fund manager, who
requested anonymity because he didn’t want people to know his investment strategies, says he spent three or four
months last year trying to make a deal work. Back then he figured the spread would only be open for a few months.
But he couldn’t recruit enough truck drivers, or get access to unloading terminals at Cushing, so he gave up. In
retrospect, he says, he wishes he’d pursued the trade harder. Given how long the price spread has stayed open, if he’d
kept at it, he probably would have made a killing. It would’ve worked like butter, he says.
The brains behind the deal propelling Meredith’s tugboat run is Brian Swearingen, who oversees crude oil
operations for High Sierra, an energy-logistics company based in Denver. A bearded, burly man in his early 60s from
Bartlesville, Okla., Swearingen has spent more than 30 years buying and selling oil. Last year he persuaded his
bosses at High Sierra to let him start barging crude out of the port of Catoosa and selling it to refineries like Hunt
along the Gulf. High Sierra had the perfect combination: a fleet of trucks, storage tanks, and access to a terminal at
the head of the port.
Swearingen barged his first oil out of Catoosa in J uly 2011. In the 14 months since, he’s sent a steady stream of three
or four barges a month to the Gulf, each loaded with 40,000 to 45,000 barrels. Over that time the price of light, sweet
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crude on the Gulf Coast has cost an average of $16 more than a barrel of WTI. At about 150,000 barrels a month,
that’s more than $30 million of gross margin since last summer. Certainly, the costs of barging and trucking eat into
that, but the trade’s clearly been profitable for Swearingen and High Sierra. In J une, Tulsa-based NGL Energy
Partners merged with High Sierra in a $693 million deal.
Photographs by Daniel Shea for Bloomberg
BusinessweekOil stored at Plains All American includes light, sweet crude from Oklahoma (left and middle) and
heavier grades from Canada
Moving crude around isn’t without risk. The smaller the spread, the less money Swearingen makes. Since last
summer, the price differential between WTI and Gulf Coast light, sweet crude, known as Louisiana Light Sweet, has
fluctuated from $8.50 a barrel to nearly $30. “That differential can vanish in a heartbeat,” says Swearingen. “But my
risk nature throughout my career has always been to make hay while the sun shines.”
There’s another way to make money from Cushing. Since the crash of 2008, WTI has mostly been in what’s called
contango—a commodities term that means prices are expected to rise in the future. During contango, a contract to
buy oil a month from today costs more than the current price. The further into the future you go, the more expensive
it becomes. As long as the price of oil is expected to rise in the future, there’s an incentive to store it and sell it for a
higher price down the road. This means an oil trader with access to space in Cushing can sell a futures contract to
lock in that higher price a month or two down the road and then just sit on it. Some call that hedging. “I call that
printing money,” says Westover, the “crude bartender” for Mercuria.
Domestic oil trading hasn’t always been this hot. In the last five years, a small oil trading and logistics firm out of
Houston called Musket has nearly doubled the size of its trading floor, from 55 seats to 95. In J une it moved into a
trading floor with nearly twice the space. “Everyone’s hiring right now,” says Musket’s managing director and vice
president of trading, J .P. Fjeld-Hansen. “My trading floor is a sea of two demographics: 50-year-olds and
25-year-olds. There’s no one in between because for the last 25 years the domestic oil market was the least exciting
business to be in.”
While the giant pool of oil has been a boon for Cushing, there are signs the glut is reaching a point of diminishing
returns. As the surplus grows, the smart money is starting to circumvent Cushing by taking oil straight from the well
to the refinery and cutting out the storage middleman. “Cushing is no longer the premier market,” says Fjeld-Hansen.
Since 2008, Musket has been buying oil from the wellhead in North Dakota and railing it straight to the Gulf Coast
refiners. “We were probably one of the very first people to make that move,” says Fjeld-Hansen. Initially, Musket
sold its North Dakota barrels into Cushing. But Fjeld-Hansen says he hasn’t sold a drop of oil at Cushing in more
than a year. Recently he’s also been sending it to the East Coast by rail, where refiners are stuck taking more
expensive imported oil. He’s up to about 40,000 barrels per day. “Why would I sell into Cushing when the price is so
depressed there?” he says. “Let’s say it costs me $9 to rail from North Dakota to Cushing, but it costs me $12 to go
all the way to the Gulf Coast. If I can get an extra $10 to $15 at the Gulf Coast than what I would get at Cushing,
why in the world wouldn’t I just keep going?”
In an odd step back in time, railroads are moving more crude these days than they have since the early part of the
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20th century. In 2009 railroads moved a total of about 7.5 million barrels. In the second quarter of 2012 alone they
moved more than 36 million barrels. The trend has given a boost to railroad companies such as BNSF (BRK/A) and
Union Pacific (UNP). Rather than sign long-term contracts with pipeline companies, big oil producers such as
Phillips 66 (PSX), Statoil (STO), and Hess (HES) are starting to lease and purchase their own rail cars. In a
September note to clients, Goldman Sachs Energy analyst David Greely wrote that rail is starting to overtake the
reversed Seaway as the biggest means of clearing out the Midwestern oil supply.
Still, there’s a reason companies built all those pipes half a century ago. Moving oil by pipeline costs about one-third
what it does to move it by railroad. Using trucks and barges is even more expensive than trains. Eventually new
pipeline projects will be completed, and America’s infrastructure will reorient itself around all this new domestic oil.
Yergin sees this as part of a much larger “geographic pivot” that will further decrease U.S. dependence on overseas
oil and make for a much more integrated North American oil market with Cushing at its heart.
Until then, as long as oil remains stuck in the middle of the country, unable to efficiently find an economic home,
West Texas Intermediate prices are likely to remain depressed. As long as that price spread is there, creative oil
traders will take advantage of it and make big profits. Barry Meredith and his tugboat will keep working the loop,
helicopters will keep circling over Cushing on their spy missions, and Brian Swearingen of High Sierra will
keep trading. “I’ve been in this business for 30 years,” says Swearingen, “and I’m having more fun than I’ve ever
Philips is an associate editor for Bloomberg Businessweek in New York. Follow him on Twitter @matthewaphilips.
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