A price is always a price somewhere. For a physically settled contract, that somewhere is the delivery point, and it introduces a local supply-and-demand problem that has nothing to do with the world market.

WTI delivers at Cushing, Oklahoma: an inland tank farm at a pipeline crossroads, hundreds of miles from the coast. Barrels arrive by pipeline and leave by pipeline, and the capacity of those pipes is finite and slow to change. So the WTI price is a price for oil in a specific set of tanks, reachable only through specific pipes, and when the pipes are constrained the price there can decouple from everywhere else.

That is not a flaw in the contract. It is what a physically settled contract is. But it means the benchmark carries a local basis that a waterborne benchmark does not, and it is why Cushing inventory is watched with an intensity that a single tank farm would not otherwise deserve.

WORKED EXAMPLEWhy a landlocked hub can dislocate

Inbound pipeline capacityhigh, and rising with new production

Outbound pipeline capacity to the Gulffixed in the short run

Local tankagefinite

Result when inbound exceeds outboundstocks build toward capacity

Local price must fall far enough to shut in production or halt inbound flow

The 2020 episode where the expiring contract traded below zero was this mechanism at its limit: nowhere to put the barrel and an obligation to take it.

Waterborne benchmarks avoid that specific failure because a ship can go anywhere. If North Sea crude is cheap relative to elsewhere, someone charters a vessel and moves it, and the arbitrage is limited by freight rather than by pipeline capacity. Freight is variable and can be expensive, but it is rarely zero-capacity in the way a full pipeline is.

EIAEIA InventoriesLIVE FROM THE DESKOpen on the desk

US inventories including the Cushing delivery-point series.