Daily Management Review

Why US Oil Storages Are Full to the Brim?


02/23/2016


Recently, there was rumors that a storage in the largest oil hub in the United States - Cushing – is filled almost to capacity. However, such a large stock may not be linked to oversupply and lack of demand.



Gnangarra, commons.wikimedia.org
Gnangarra, commons.wikimedia.org
Earlier this month, Reuters reported that there are about 8 million barrels left to a full load of Cushing storage, and the terminal is already beginning to refuse oil traders’ requests to stock oil.

According to the Energy Information Administration of US Department of Energy, oil storage facilities in the United States have reached 504.1 million barrels - the highest since 1930.

It is possible that this is fault of speculators and so-called contango (the futures price of a commodity is above the expected future spot price).

First, a bit of history. In 1862, one of the greatest American industrialists - Andrew Carnegie - decided to make money out an oil storage. He and his partner bought a few oil wells in western Pennsylvania and dug a giant oil storage tanks. Then, a barrel was worth about $ 1, according to the BP Statistical Review’s data. The idea was simple. The partners planned to store the oil until the market supply increase, and prices reach $ 10. However, the proposal was not decreased, and the idea had to be postponed.

Yet even now, the idea of earning on oil stocks is still alive and is actively used by speculators. Moreover, modern financial market allows traders to avoid unnecessary risks. For example, now one can simultaneously buy real oil to store and sell distant futures, which provide guaranteed price on oil delivery.

All that you need to pull the job is oil storage price not higher than difference between the futures price and the spot price, and confidence that oil will be delivered in the specified period. Well, it is difficult to imagine the best time for such speculation. The difference in prices between April and March futures for WTI blend is now almost at a maximum of 4 years.

This is an important reason that Cushing storage is full to overflowing. Traders are sending oil to the storage without any risk. Bloomberg agency reported that the cost of storage of one barrel of crude oil last week rose to $ 1.43, but even is profitable.

It is important to note that in the Cushing hub delivers oil on futures contracts, so that storing oil there eliminates unnecessary problems with delivery.

source: marketrealist.com






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