Inventories in Cushing, Okla., the delivery point for futures traded on the New York Mercantile Exchange, have jumped more than 40% in the month ended Jan. 2 to the highest level since at least April, 2004, when the government started collecting Cushing data.
Such stockpiling reflects the wide gap between the price of oil for delivery in the next month and contracts to deliver oil later this spring and summer. On Monday, oil for February delivery closed at $37.59 a barrel on the Nymex, or nearly $15 lower than July’s contract price. Read more on oil prices.
This situation, where the price of a near-term future contract is worth less than oil for delivery in several months, is called contango. It’s the norm in oil markets, with the price gap representing the cost of storing the oil and locking up investors’ money.
But such a distance between contracts is unusual, sparking industry insiders to term the phenomenon — which reached an apex in late December – “super contango.”
When the price spread is greater than the storage cost, “there is an opportunity to arbitrage at a profit without risk,” said James Williams, an economist at energy research firm WTRG Economics.
This gap between near-term and far-off future prices partly reflects current sluggish demand and expectations that demand will pick up in the following months. At less than $38 a barrel, oil is currently trading nearly $110 lower than its record high hit in July.
So instead of selling oil at a depressed price amid sluggish demand, more producers and investors are hoarding oil for future sales.
Those stockpiles are showing up in ballooning inventories at Cushing.
“When the market flips into contango, meaning the current month is less expensive than the month going forward, people start putting crude into storage,” said Jeff Mower, editor-in-chief at Platts Oilgram Price Report.
Contango “creates a financial incentive to store more barrels.”
And as the current contango widens, as analysts say is likely, Cushing could run out of room.
Maximum storage capacity in Cushing is about 42.4 million barrels, but only about 80%, or roughly 34 million barrels, of that is operable storage space, says Linda Rafield, senior analyst at Platt. With 32.182 million barrels now sitting in Cushing, the market appears poised to test the limits of storage capacity there