Cushing hub isn’t the whole crude oil market
Futures contracts stable
John Kemp
— Editor steady contango structure, where the prices of longer-dated futures contracts trade above those for near-term delivery, traders have bought up surplus oil and shipped it to Cushing to store.
“Cash and carry”, as the strategy is known, exploits differences between the implied cost of storage, financing and insurance embedded in the term structure of futures contracts and the actual cost traders pay to borrow funds and secure tank space.
In principle, once all the components of a cash and carry strategy are in place it is a riskless source of arbitrage profit. For convenience, however, and to eliminate one potential source of risk, traders prefer to store oil close to the NYMEX delivery point in case they decide to make physical delivery.
Attracts
Cushing therefore attracts crude more than other locations when the futures market structure is favorable for storage plays. Other locations in the rest of the Midwest and in the major refining centers along the US Gulf Coast have seen much smaller proportionate builds in crude stocks over the last 15 weeks.
Cushing is enormously important from a logistical point of view for anyone trying to make or take physical delivery of US crude against NYMEX futures and has been the source of some famous squeezes and market manipulations in the past.
But it is not really representative of the supply and demand situation for the country as a whole let alone globally. If the tank farms at Cushing reach full capacity, there are plenty of other options for storing oil in other parts of the country.
The structure of futures prices suggests traders are not worried about running out of onshore storage space and see little need to explore more expensive options for storing oil offshore on board tankers.
Having moved into a substantial contango since July 2014, the price difference between June and December 2015 futures contracts for both US crude futures and Brent futures has remained largely unchanged since the end of January even as reported crude stocks have continued to climb.
If the market was concerned about space at Cushing and onshore more generally, the contango would have widened even further as stocks rose to make it profitable to use more expensive offshore storage.
However the term structure of futures prices has remained essentially unchanged for the past two months — implying traders are not particularly concerned about storage issues and do not foresee the need for more expensive options like floating storage.
Markets are not infallible: the current view about storage space and inventories could prove to have been complacent. But right now physical traders do not seem worried about storage space running out. (RTRS)