By Izabella Kaminska
WTI front-end futures have experienced some extreme price volatility during the past two weeks due to distortions stemming from full-to-the-brim storage facilities at Cushing, Oklahoma.
(Cushing is the main physical delivery point for Nymex WTI crude.)
Moreover, the latest inventory data from the EIA released on Wednesday showed Cushing stocks rose by 1.6m barrels in the week to a record 36.2m barrels. In other words, there’s continuing pressure on storage.
The inability for traders to deliver easily into the hub has the effect of depressing the time-spread between the front-month and second-month, as traders look to close out positions which would otherwise force them to take delivery without the means to store oil.
This has led to an intensification of the front-end contango, as the following chart from Bloomberg reflects:
As John Kemp, Reuters’ commodities guru, observed on Wednesday:
The continued stockbuild around the NYMEX delivery point at Cushing is inducing some remarkable movements (and volatility) in both the both flat price (CLc1) and the timespread (CLZ0-CLM0). The flat price has fallen 7.5 percent in the space of just two trading days. Front-month volatility has lept from 23 percent to about 28 percent in the space of a week (the highest level since March 18).
Of course, this has happened before. And as Olivier Jakob at Petromatrix notes there’s still some way to go before the situation gets as disruptive as it was in April 2009:
The wide contango on WTI and the WTI discount to Brent has however resulted in an offsetting increase in the US Gulf sour crude oil differentials to WTI, with Mars now inventoried at par to WTI. Hence if June WTI has lost -3.72 $/bbl versus Brent since the start of April, US Gulf crude has been unchanged versus Brent in the same period. Europe is burning on all sides. In the north, the ashes are back and forcing some airport closure in Ireland and Scotland. The situation is clearly not as bad as earlier in April but will nonetheless require a constant monitoring. In the south, European politicians are trying to convince the opinion that the smoke coming out of Greece, Spain and Portugal is not the result of any fire but the markets are voting with their feet and the Euro is trending towards the lows of 2009.
However, with BP now reporting some progress in its attempt to plug its leaking rig in the Gulf of Mexico, we could still see some more volatility yet.
The bearish bit in the EIA stock data - FT Alphaville
Is Cushing souring up the oil market?- FT Alphaville
It’s all about Cushing – FT Alphaville