Storage capacity cuts crude price

May 24, 2010
Tightening storage capacity at Cushing, Okla., pushed the front-month crude contract price down 1.7% in the New York market in mid-May.

Tightening storage capacity at Cushing, Okla., pushed the front-month crude contract price down 1.7% in the New York market in mid-May.

"Inventories at Cushing continued to set new records as [stocks] rose 784,000 bbl to 37 million bbl in the week ended May 7, driving the [June-July contracts] spread to $4.59/bbl, the widest divergence between the front-month contracts since February last year. High inventory levels have also driven the spread between June and December contracts wider, which is now at $10.44," said Anuj Sharma, research analyst at Pritchard Capital Partners LLC. "The widening spread will encourage buyers to store crude for forward delivery and will provide price support at these levels. However the euro-dollar relationship, which is largely being driven by the events in Europe, will continue to call the shots in the near term."

Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, "The front of the West Texas Intermediate [price] curve sags further as the Cushing build continues. The Cushing distortion seems to have taken at least $9/bbl away from prompt WTI values, with sovereign debt and oil demand concerns representing a further, although less significant, source of downward pressure."

Brent price pressured

Horsnell said the build in Cushing inventories likely has put downward pressure on North Sea Brent as well, "if nothing else due to some buying of the prompt WTI to Brent spread, perhaps under an illusion that the prompt relationship could be arbitraged during a dislocation."

He said, "In all, we would put forward $9/bbl as a reasonable measure of the depressive impact on WTI of the build up of inventories at Cushing over the course of the quarter. That leaves about $1/bbl over the quarter to date and about $6/bbl from the second quarter highs as being a rough measure of the more general external and internal downwards pressure on the oil market."

Rising US oil inventories generally are expected to keep downward pressure on oil prices in coming months. Adam Sieminski, chief energy economist, Deutsche Bank, said, "High inventories were less of a threat to the market when the trend was falling, but stocks are now rising and contango is exacerbating the situation."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Pension funds and asset managers have been piling into WTI-linked commodity indices and exchange traded funds to have exposure to the Shanghai oil demand in 2020, but with the wider WTI contango they will increasingly realize that they have instead bought prompt exposure to a local US market in 2010."

He said, "With the continued shift in the oil infrastructure of the US Midwest (increased storage capacity, increased Canadian pipeline capacity, increased domestic production) the WTI contract will continue to be less sensitive to world events. The danger is to look at the historic charts on the WTI time spread or on the WTI-Brent spread and assume that they will return to the historical mean. The US Midwest oil infrastructure in 2011 will be materially different to the infrastructure of 2001, hence risk managers need to stress relative trades on WTI outside of the mean-reverting assumption."

China demand

China product demand appears to be holding up, Sieminski said. "April oil data for China indicates sustained robust apparent demand growth of 13% year-on-year, based on preliminary figures. Most notable in the April China data set was refinery runs, which hit a new record of 8.4 million b/d. China's crude oil imports also hit a record of 5.2 million b/d, representing 57% of China's total crude supply and reflective of the country's increasing dependence on foreign oil. In terms of self sufficiency, China and the US are nearly equals as imports represent more than 60% of total US crude supply," he said.

Horsnell reported, "The US oil demand renaissance is perhaps more totemic for the market rather than being a key driver of fundamental global balances. The latter role seems to have shifted to China, even if the immediate market impact of data from China (population about 1,337,490,000) is less than that of barrels in Cushing (population 8,371)."

The record level of Chinese crude imports in April represents a year-over-year increase of 31% and a month-over-month increase of 4%. "So far this year, the positive surprise in Chinese demand has been sufficient to cancel out the combined impact of weakness in Europe and upside surprises in non-OPEC supply, tending to leave estimates of the call on OPEC liquids relatively stable," Horsnell said.

(Online May 17, 2010; author's e-mail: [email protected])

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