On the way to Cushing, Oklahoma, a young man, weary from the traffic
and the chaos of the mule skinners, teamsters, and oilmen, sought refuge
in a cobbled-together, unpainted saloon at the side of the road. He had
been hub-deep in the mud for more than an hour, waiting to get into
town, but had traveled less than a mile in the waning twilight.
Discouraged,
he made his way to the bar to order a drink. Glancing down, he saw an
inebriated man drowsing on the floor. Nearby, two men were slumped over a
card table, nodding off. The bartender, who also seemed to be dozing,
ignored him when he spoke. When he touched the bartender’s arm, the man
crashed into a heap on the sawdust-covered floor. That’s when the young
man noticed the cash register was open and empty. Everyone in the room
was dead.
Rushing outside and shouting, “Murder!,” the man tried
to flag down help, in vain. It was the height of Cushing’s oil boom. By
1917 the town was pumping more than 300,000 barrels a day. None of
Cushing’s wildcatters — among them future oil billionaire J. Paul Getty —
wanted to lose his place in the bumper-to-bumper line to the oil
fields. Violence was commonplace. Robbery, looting, and murder were part
of the landscape. It’s a story told among the residents to this day,
and can be found in the out-of-print book Cushing: The First 100 Years.
Once
at the center of America’s black-gold rush, Cushing is now the world’s
largest onshore oil storage and energy market hub. Signs of its long,
tumultuous history can be seen throughout the town, which is situated on
a barren plain surrounded by muddy grasslands. Pump jacks swinging
their slow, mesmerizing limbs search for the last of the region’s oil in
backyards, schoolyards, churchyards, and empty lots. The city’s
population, which peaked in 1930 at just below 10,000, has been in
decline ever since, lingering at slightly above 7,000. The town’s
graveyards have more people in them than the homes. Beneath the ground,
oil pipelines converge from every corner of North America, harking back
to when oil flowed in Texas and Oklahoma seemingly without end.
“It’s just been a part of life here for as long as I can remember,”
says 70-year-old Farrel Kleckner, a retired postman and a lifelong
resident of Cushing. He also serves as the town’s honorary historian.
“When I was a kid growing up on Cherry Street, I’d go out on the porch
and the whole town would smell like sulfur. No one complained. People
would say it smelled like money.”
But the tiny town of Cushing is
now the focus of a monthslong government investigation into why the
price of West Texas Intermediate light sweet crude oil futures dropped below zero on April 20, briefly trading at minus $40.32 a barrel before settling at
–$37.63.
“The
one thing that everyone will remember about the oil market is that it
went negative in 2020,” says Paul Horsnell, head of commodities research
at Standard Chartered in London. “This is a physical story. It’s a good
story because it’s a resonant story. Look at what was going on in the
world at the time with the pandemic. A lot of people were panicking. The
markets were under extreme stress, and prices and demand were falling
very rapidly. The numbers in Cushing did look pretty horrible — but
Cushing did not fail.”
The reason Cushing is a physical story
is that it provides physical barrels of oil to investors across the
globe betting on the most heavily traded commodity on earth: light sweet
crude oil futures, traded on the New York Mercantile Exchange.
Indeed, it is the connection between the cash prices for Cushing’s
“wet” physical barrels and the “paper” prices of Nymex crude oil futures
contracts that gives the market its credibility. Each Nymex contract is
exchangeable for 1,000 barrels of physical crude oil.
Horsnell,
who is based in Oxford, England, has been to Cushing a few times,
usually as a pit stop on trips to Oklahoma City. “There’s not anything
to see or do; it’s just a pipeline crossroads,” he says. “But I always
insisted on taking the diversion, much to the frustration of my
colleagues.”
Each time he has visited, he’s surveyed the town’s
“tank farms” — hundreds of massive steel oil tanks stretching from north
to south, as far as the eye can see.
A lonely outpost in what
was once “Indian Territory,” Cushing is an unlikely physical delivery
point for barrels of oil against the West Texas Intermediate futures
contract, but its influence was cemented long ago with its oil boom. The
city is more than 500 miles north of Houston’s international shipping
channel, 70 miles northeast of the nearest major metropolis — Oklahoma
City — and 1,400 miles from Wall Street.
When the first crude oil contract started trading there, few
suspected it would permanently put Cushing on the map, let alone rivet
generations of Saudi oil ministers and market prognosticators, but
that’s exactly what happened. Launched in 1983, the Nymex crude oil
futures contract almost immediately became a global benchmark and, to
this day, remains the basis for how banks, hedge funds, trading firms,
power plants, gas stations, and fuel distributors around the world price
a barrel of oil.
In the nearly four decades since, Cushing’s oil
pipelines and storage infrastructure have rapidly expanded, gobbling up
hundreds of acres of the town and its outskirts, with a handful of
companies dominating the terrain and the profits. “The delivery point
for the oil contract is there because the infrastructure was already
there, and now there’s even more infrastructure there because the
contract is there,” Horsnell explains.
“It’s a little bit of a historical accident,” he adds.
The
reason Cushing’s numbers looked so horrible last spring is that, just
as oil prices fell below zero, the town’s oil storage tanks appeared to
be nearly full, triggering a price collapse that did not stop, even when
the barrel lost all value. At the time, investors were racing to
liquidate their positions in Nymex crude oil futures before the contract
expired and entered its delivery phase in Cushing. Many were forced to
sell at negative prices after learning there might not be enough room
left in Cushing’s oil tanks to take delivery.
Such incidents, though rare, are not necessarily shocking, given
Cushing’s idiosyncrasies. “The fact is, commodities are great big bulky
things when you have physical delivery,” Horsnell says. “The mechanics
of the market can have bizarre effects on prices. Physically delivered
commodities aren’t like financially settled contracts. When you get into
commodities, you get into all kinds of trouble with physical delivery.
Infrastructure matters. The old economy, of which physical commodities
are a part, is clunky.”
Crude oil’s plunge into negative territory
is now the subject of an investigation by the U.S. futures regulator,
the Commodity Futures Trading Commission. Although oil prices have not
turned negative again, questions remain about what, exactly, happened
and if there was market manipulation afoot. In the aftermath of the price crash, CFTC chairman Heath Tarbert
announced that he would undertake a detailed forensic study into what
he called “the crude oil price aberration on April 20."....
