Crude storage tanks nearing their brim spur ‘super contango’

NEW YORK (Bloomberg) -- Surging U.S. crude stockpiles that have filled storage tanks near capacity are widening the discount on immediate oil deliveries.  

 

Spreads between monthly oil-futures contracts are often seen as a reliable gauge of market conditions, and a discount on the earliest months—known as contango—typically signals that supplies exceed demand. Contango isn’t "going away anytime soon," Societe Generale SA analysts said in a research note on Tuesday.

 

"We don’t get this kind of super contango unless there are concerns about how much spare storage capacity is available," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone.

 

Front-month contracts of U.S. benchmark West Texas Intermediate closed at a $1.46/bbl less than second-month futures on Tuesday. January futures traded at $42.39/bbl at 11:29 a.m. on the New York Mercantile Exchange and February futures were at $43.77. 

 

WTI Cushing spot closed at a $1.70 discount to January WTI on Nymex Monday, the most since 2010. The spread was at $1.60 Wednesday.

 

"Storage offshore becomes a viable option with these kind of spreads," Evans said. "It costs about 45 to 50 cents a barrel per month to store crude on land. It rises to the $1-to-$1.25 per barrel a month range, depending on the specific vessel, when stored on a tanker."

 

Nationwide, crude supplies climbed to 487.3 MMbbl in the week ended Nov. 13, the highest for the time of year since 1930, Energy Information Administration data show. 

 

Cushing Supplies

 

Stockpiles at Cushing, Oklahoma, the delivery point for WTI futures and the biggest U.S. oil-storage hub, rose to 56.9 MMbbl, the most since August. Total storage capacity for the site was 71.4 MMbbl as of March 31, the EIA said. The tanks can actually store only about 65 MMbbl of oil, if you take into account space required for operations, such as blending and segregating, Plains CEO Greg Armstrong said in April.

 

The differences between contracts may narrow somewhat in the second half of 2016 as the market rebalances, Mike Wittner, head of oil-market research in New York at Societe Generale, said by phone. "Contango won’t go away, and we definitely won’t see backwardation," he said.

 

Backwardation is a structure where short-term supplies cost more than later deliveries, indicating supplies are tight.