Jump in storage levels will keep pressure on oil
‘Price should move down even further’: analyst
CALGARY • Collapsed oil prices will continue to face downward pressure in an already-volatile market as larger-than-expected volumes of crude are being injected into storage across North America, analysts say.
“The price should move down even further in the short to medium term,” Brian Busch, director of business development at Louisville, Ky.-based Genscape Inc., said of oil prices.
After a four-day rally, the West Texas Intermediate benchmark price dropped 8.7% in trading on Wednesday to close at US$48.45 per barrel, erasing earlier gains.
Mr. Busch said his company, which tracks oil storage across North America, has seen surges in levels along the Texas coastline and at Cushing, Okla., where the WTI benchmark price is set.
Data released Wednesday by the U.S. Energy Information Administration showed that 6.3 million barrels of oil had been injected into storage tanks last week, more than double what many analysts had predicted.
“It is clearly larger than expected,” said Sandy Fielden, director of energy analytics with Houston-based RBN Energy. He added that it’s unclear whether the oil stored at hubs such as Cushing is heavy oil from Canada or light crude from the U.S.
Regardless, he said the surge in storage is a sign of oversupply in the wider market, which is bearish for prices. “Until that storage goes away, it’s going to hang over the market,” he said.
Dina Ignjatovic, an economist with TD Economics, said in a research note that this uptick puts total storage levels at their highest level on record for this time of year.
“Overall, we expect the supplydemand imbalance to grow in the first half of the year, before narrowing thereafter,” Ms. Ignjatovic wrote. “As such, there is likely more downside in store for oil prices over the next six months.”
Oil traders have been moving large volumes of crude oil into storage in the U.S. to take advantage of an arbitrage opportunity called contango, in which the price of oil delivered in the future is higher than oil delivered today.
In a note Wednesday, Calgarybased AltaCorp Capital said the current one-year contango spread has reached $10 per barrel, which creates a financial incentive for commodity traders to move oil into storage. “Prices will fall until spreads sufficiently widen to support storage arbitrage.”
At Genscape, Mr. Busch said that the cost of storing oil at Cushing is roughly 40¢ per month, meaning there is an opportunity for traders who want to be paid more for their oil in the future to store it, and then unleash it on the market a year out.
Reuters reported that of the 6.3 million barrels stored last week, 2.2 million barrels moved into Cushing. Mr. Busch said he expected similarly high volumes to be stored there over the coming weeks, to the point that Cushing could reach maximum operational capacity by early spring.