Source: PetroMatrix
After weeks of criticism that the USO’s 20% stake in the Nymex WTI contract was distorting the benchmark oil price, the Commodities and Futures Trading Commission last night announced it was investigating the situation.
Criticism of WTI late last year and in January focused on whether storage at Cushing, the delivery point for the WTI contract, was depressing the price as its neared capacity.
But in recent weeks and days USO has been the focus of claims of distortion in the contract, as retail investors piled in to take advantage of low oil prices (a practice which many argue was utterly misguided) – and one of the most strident critics is analyst Olivier Jakob of Petromatrix.
The usual culprits at Cushing are thought to be pipelines that can’t be turned off, and limited routes for export due to it being landlocked. Note that Nymex/CME reject both these claims. In a note for FT Alphaville’s Long Room (membership required), JBC Energy wrote a guide to Cushing.
- Storage capacity at Cushing is 43m barrels of oil equivalent; but only 80% (34.5m) is operable
- Three firms with the most capacity there are Enbridge (15.5m), Plains (10.8m) and BP (7.8m). The remainder is owned by Semgroup, Teppco, Duke Energy and ConocoPhillips.
- It can be used for non-sweet crudes (in August 2007, 25% of storage was estimated to be used for sour crude, which is not deliverable against Nymex)
- Capacity has risen rapidly in recent years and is expected to rise to 50m by the end of this year
Here is a short timeline of the events leading up to last night’s announcement:
Jan 15: Costanza Jacazio, an oil analyst at Barclays Capital, tells the FT that WTI is ‘about as useful as a chocolate oven glove‘ as an indicator of broader market conditions after the spread between WTI and other benchmarks reaches record levels, at one point trading $11.56 below Brent.
Jan 18: FT reports signs of a shift away from WTI as the International Energy Agency analyst said there was anecdotal evidence of traders moving away from WTI and “doing deals based on other US oil benchmarks”. Nymex responds that the WTI contract is performing “transparently”.
Feb 11: The IEA’s monthly report accused WTI of “sending mixed and misleading price signals, not only to the market but to economic forecasters, government officials and policymakers”.
Feb 18: USO announces it will roll its positions over four days instead of one.
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Curiously, the CFTC initially said it was not looking at USO any closer than usual. Reuters India published the following story at 3.09am IST this morning:
NEW YORK, Feb 26 (Reuters) – A spokesman for the U.S. Commodity Futures Trading Commission said on Thursday there is no indication that the United States Oil Fund LP is under investigation, despite the massive futures position the firm’s exchange-traded fund holds in the U.S. crude futures market.
“There is no indication there is an investigation,” CFTC spokesman R. David Gary said. But he added that the agency was monitoring USO’s huge position as part of its normal surveillance activities.
