Wednesday, December 24, 2008

Oil: "It’s all about Cushing"

A couple weeks ago we saw "Contango Pays Most in Decade as Shell Stores Crude....". Last year Ann Davis of the Wall Street Journal wrote one of the most intelligent general audience oil stories I've ever read, "Where Has All The Oil Gone?" on the flip side of the current situation:
...The reasons Cushing's crude has been disappearing are surprisingly complex, and shed light on the growing involvement of speculators in the global oil market. Tanks are emptying partly because producers have been straining to keep up with demand. But investment banks and other financial firms also played a part by abruptly shifting their oil-trading strategies this summer....
Yesterday FT Alphaville wrote:

Yes, yes - oil is falling. Nymex WTI is sub $40 per barrel.

But the case of Cushing is becoming increasingly important in regards to the pricing of the contract. Cushing, in Oklahoma, is the delivery point for Nymex WTI, which means anyone who wants to take physical delivery must have access to storage at Cushing. Of course, Cushing has a limited capacity. Also, oil can only flow in one direction out of storage there. As a result it can get bottlenecked relatively easily if demand for storage is elevated. This becomes increasingly likely when there is a contango in the market because the dynamic encourages oil storage.

Of course, we’ve seen this before - the last time a super contango was apparent in the market was back in April 2007. As a result, WTI became increasingly disconnected from Brent as well as other US crude grades like Mars.

It seems the problem may be re-emerging according to JBC Energy (our emphasis):

The latest inventory data will also give more direction to WTI, which slumped recently compared to other crude benchmarks. In the physical market, the WTI 1st Mth/Brent 1st Mth spread widened to almost -$7.80 per barrel, down from strong premiums of more than $6 per barrel a month ago. This can be mainly attributed to increasing inventory levels in Cushing (PADD II), the delivery point for the Nymex Light Sweet Crude Oil Contract....MORE