Friday, January 16, 2009 0 comments ++[ CLICK TO COMMENT ]++

What happens when Cushing fills up?

Storage tanks at Cushing, Oklahoma.
(Image by Brandi Simons for The New York Times)


If you are an inhabitant of Cushing, Oklahoma, and thought you were living in some no-name town in the middle of nowhere, you would be happy to know that your sleepy town has become famous. Practically every stock market investor in the world has learned a bit more about Cushing--it has certainly been the case with me. Storage depots at Cushing store the oil that underpin the West Texas intermediate crude futures market. As New York Times reports, it has been filling up at places like Cushing, as well as being stored in ships:

A year ago, oil producers and refiners could not move their products fast enough to meet growing world demand and chase rising prices. Now, with demand and prices slumping, they are sitting on 327 million barrels at tank farms around the country, particularly at Cushing, Okla., a major storage hub and a crossroads for pipelines. That is more than 40 million barrels more in storage than this time last year, and more than 30 million barrels higher than the five-year average.

...

With storage tanks filling up onshore, private and national oil companies, refiners and trading companies are storing another 80 million barrels aboard 35 supertankers and a handful of smaller tankers, the most in 20 years, according to Frontline Ltd., the world’s largest owner of supertankers.

The different players have different reasons for storing oil, whether onshore or offshore.

National oil companies are hoping to reverse the price slide by holding oil off the market. Iran alone is reportedly using as many as 15 tankers to store crude oil in hopes that higher prices will prop up its economy, which is dependent on oil exports.

Private trading companies like Vitol and Phibro are storing oil in expectation of higher prices. They are taking their cues from markets where traders buy and sell contracts for future delivery of oil, which are signaling higher prices down the road.

Adam Sieminski, chief energy economist at Deutsche Bank, noted that a trading company could buy oil at the spot price of nearly $40 a barrel, store it and sell a contract to deliver it in a year for about $60. “You pay between $6 and $10 a barrel to store it, and you can make $10 a barrel,” he said. “That’s why Cushing is filling up rapidly and people are leasing tankers.”


We are also seeing an unusal scenario of WTIC trading below Brent crude. Mike Shedlock pulls some stories providing some theories on what is happening. According to an analyst quoted in one of the stories, the current scenario, although not common, is to be expected.

Ahmad Abdullah of GaveKal has suggested that Big Oil does not hedge, which also implies that Big Oil does not speculate. So the speculative bets involving storing oil in tankers, ships, etc is driven almost entirely by smaller producers, national oil companies, and investors.

The question I have right now is, what happens when Cushing fills up? What happens when all the ship storage, land storage, etc is full? Are we looking at a massive plunge in spot prices?

Something to watch...

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