NYMEX light, sweet crude for January delivery on Wednesday traded at a $1.30 a barrel discount to crude for delivery a month later, more than double last week’s discount and the steepest contango since mid-August. January barrels traded for $77.85, a $3.70 a barrel discount to May barrels.
Millions of barrels were drawn ashore into U.S. physical crude markets over September and October, when contango discounts averaged between 30 and 40 cents a barrel, or less than the cost of tanker storage.
It is relatively cheap to lease 2 million barrel-capacity very large crude carriers (VLCCs), translating into costs of around 50 cents a barrel per month to store crude offshore, according to Mike Reardon of freight derivatives exchange Imarex.
Some higher storage price estimates of around $1 per month, which account for insurance and other expenses, would still make offshore storage lucrative.
Traders can buy oil cargoes, store them, and commit them for sale later to lock in profits. Such plays have been popular among major global oil traders like Vitol SA, Royal Dutch Shell (RDSa.L), ConocoPhillips (COP.N), and Koch Industries, helping to spur big trading gains.
U.S. waters are probably the most attractive storage bet, since the one-month contango discount in Europe’s Brent oil contract is only 61 cents, less than half the NYMEX level.
“The contango again justifies storage plays near the U.S. Gulf Coast,” said one cash crude trader who requested anonymity. “Onshore storage has been filling up too, and the contango is likely to get bigger.”
Contango, which often reflects weak near-term demand for crude, has also bolstered stock levels at the giant tank farm in Cushing, Oklahoma — the landlocked delivery point for NYMEX light, sweet crude. Cushing stocks rose in three consecutive weeks through Nov 20, growing 11 percent to 28.32 million barrels over the period, according to U.S. Energy Information Administration data released Wednesday. Cushing storage peaked near 35 million barrels in February.
The EIA showed total U.S. commercial crude stocks rose 1 million barrels last week to 337.8 million barrels, up 19.5 million barrels from year-ago levels.
Seaborne storage volumes add to surpluses in global oil markets and helped to depress oil prices early this year, after they surged to a record above $147 a barrel last July.
Shipbroker C.R. Weber pegs current crude levels in floating storage at 32 million barrels, down from more than 100 million earlier this year. Figures from ICAP Shipping showed 21 VLCCs were being used to store crude by the end of last week, up from 19 vessels the previous week. Ship broker SSY said 19 VLCCs, and two smaller tankers, were storing crude at the end of October, down from 26 tankers a month earlier.
“If the contango widens it makes (offshore storage) more attractive,” said Simon Chattrabhuti, head of tanker research with ICAP Shipping.
One shipping source said the contango could become particularly steep in the second-quarter of 2010, when many large refineries will undergo spring maintenance programs, further encouraging crude storage.
