NEW YORK/LONDON — Global oil inventories may fall from their brimming levels as crude is drawn out of storage due to the worsening economics of hoarding barrels.
Faltering returns on a popular oil trade strategy – holding crude off the market and committing to sell it later – is drawing millions of barrels into the world's physical markets.
U.S. crude for near-term delivery is trading above $68 (U.S.) a barrel after rising on expectations demand will recover as economies rebound, and on risks of supply disruptions if OPEC member Iran is sanctioned for its uranium enrichment.
As near-term oil futures gain against long-dated futures, profits from buying and holding crude to sell at a later date are shrinking.
“The incentives to hold inventory are declining and so the crude and products are being sold off,” said Mark Sadeghian, analyst at Fitch Ratings in Chicago.
A sharp contango – when oil for delivery further in the future trades at a big premium – encourages storage.
In January, West Texas Intermediate for delivery a month later was as much as $16 a barrel cheaper than crude for delivery in six months. That allowed traders to profit up to $10 on each barrel they bought and stored, analysts said.
As of Friday, the first-to-sixth month spread had narrowed to just $2.29 a barrel. That discouraged storage plays, since it cost between 40 cents and $1.50 a barrel a month to keep crude in tanks onshore or tankers at sea.
Stocks at Cushing, Oklahoma, the largest storage hub, fell 21 per cent between July 8 and Sept 25, to 26.5 million barrels, their lowest level since December 2008.
Total U.S. commercial crude stocks rose to 338 barrels, according to government figures in the week to Sept. 25, down 10 per cent from a 19-year high struck in May, and still high above a 10-year average level of 310 million barrels.
Stocks of crude at sea may be down as much as two-thirds from record levels in April, one shipbroker said Friday.
Between 26 million and 30 million barrels are being stored at sea, down from more than 100 million in April, said George Los of shipbroker C.R. Weber. Stocks fell by about a quarter last month, he estimated.
No official tally exists for crude stored offshore, and estimates vary widely. London-based ICAP Shipping estimated Friday around 22 very large crude carriers were engaged globally to store an estimated 44 million barrels last week, down from 24 in the previous week. Each ship can store 2 million barrels.
Jens Martin Jensen, CEO of tanker operator Frontline, said Friday that around 40 VLCCs were storing crude, but he estimated the fleet could thin further. Two more shipping sources estimated Friday that 25 VLCCs were storing crude.
Contango markets often occur during economic recessions, amid low demand for fuel. But in spite of economic recovery signs, many oil analysts said it's too soon to call an end to the current, year-long contango cycle in oil markets.
Financial investors and oil producers worried about inflation and a weaker dollar are plowing funds into long-dated oil contracts to hedge risk, one major crude trader said.
That and other factors may forestall market ‘backwardation,' when oil for near-term delivery is more expensive than long-dated futures.
“Tighter supply of crude doesn't necessarily mean we are going into backwardation in oil markets,” said Peter Beutel, president of Cameron Hanover in Connecticut.
“A lot of the spread is determined by whatever bets the biggest traders decide to put on, rather than on fundamentals,” Beutel said.
At least some analysts think an economic recovery may help revert the futures curve soon.
U.S. oil futures, whose front-month price is near $70 a barrel, may move into “slight” backwardation later this quarter or in early 2010, said Carl Holland of Energy Trading Solutions in Connecticut.
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