The Calgary Herald on the WTI oil glut...
Calgary Herald - Short term spot prices oil prices under pressure - A read for "longs"
"U.S. oil to keep trailing London Brent
By Joshua Schneyer and Christopher Johnson, ReutersJanuary 16, 2009
U. S. crude oil could trade sharply below London Brent for months to come as a dramatic slowdown in energy demand in the world's largest consumer nation is causing inventories to swell.
West Texas Intermediate changed hands on the New York Mercantile Exchange Thursday for as much as $10.40 a barrel less than Brent, a record discount that is particularly unusual because WTI is a lighter, sweeter grade that is easier to process into products such as gasoline.
Analysts said the unusual discount can be attributed to brim-ming crude stocks at Cushing, Okla., the delivery point for NYMEX contracts, as refiners facing weak U. S. fuel demand put crude in storage in-stead of into their processing units.
Amplifying the trend, the high inventories at Cushing have caused a so-called "contango" market structure, in which prices for crude increase over time--further encouraging refiners to build up storage at the hub.
"The contango and the deep discount for U.S. crude relative to Brent are a function of these elevated stocks at Cushing," said Harry Tchilinguirian, an analyst at BNP Paribas in London. "The contango is going to remain in place for some time."
Benchmark crude prices have fallen by more than 70 per cent from their peak above $147 US in July, but prices for crude for near-term delivery have dropped more precipitously than prices for crude for delivery farther into the future.
For example, NYMEX crude for delivery in February was running at about $35.45 a barrel Thursday, while the contract for July delivery was near $52.60 a barrel. This means a dealer could make about $17.50 a barrel --before costs--just by putting oil into a storage tank.
U. S. Department of Energy data Wednesday showed crude stocks at the Cushing hub increased by 798,000 barrels to a record 32.98 million barrels in the week to Jan. 9, extending a stretch of builds that have boosted storage by about 130 per cent since early October.
No official data on Cushing capacity is published, but a Reuters poll of five analysts estimated nominal capacity stands around 40 million barrels. An Oklahoma-based industry insider, who asked not to be named, said current storage stands at 41 million barrels, but only 34 million to 35 million barrels of storage are operational, as tank maintenance and crude-blending require tank space.
"We think Cushing storage is now maxed out for all operational and functional purposes," said Nauman Barakat, senior vice-president at Macquarie Futures USA in New York. "That could force people to sell crude here for even deeper discounts, feeding the contango and widening the spread."
The Cushing storage glut is also upending the typical price relationship between WTI crude and U. S. cash crude grades that don't face the same storage constraints, with the normally discounted Mars sour MRS-grade trading at a $3-a-barrel premium to WTI Thursday.