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No More Storage in Cushing: WTI will be $90 in a Month
By Dian L. Chu, EconMatters
The latest inventory report came out on Wednesday, March 30 from the U.S. EIA (Energy Information Administration) showing Cushing stocks at a record 41.9 million barrels (Fig. 1). And guess what? The news is only going to get worse for WTI longs, as the next couple of weeks will bring the total storage at Cushing close to the max capacity of 44 million barrels due to the fact that more traders took delivery on WTI on the last CL rollover.
MENA Does Not Matter Much
There is a three week span after the expiration where actual physical delivery takes place, so expect the next two EIA reports to test whatever remaining spare capacity exists at Cushing. In other words, it doesn`t really matter what is occurring in the MENA (Middle East and North Africa), since over the next month at the next rollover, traders will have to sell any long positions because they cannot take delivery even if they wanted to.
Abnormal Crude Deliveries
Furthermore, because of the events transpiring in the MENA over the last couple of months, traders who normally don`t take delivery have taken delivery over the last two rollovers, due to ‘what if” scenarios where Saudi Arabia became a legitimate concern, and oil spiked to $130 a barrel. The fallout from this is that traders and investors who normally take delivery will not be able to during this next rollover, as there will literally be no more storage at Cushing.
New Sellers Abound
This is very bearish for WTI prices over the next month, as now you are going to have an entirely new segment of sellers come rollover time. As such, expect the U.S. WTI (West Texas Intermediate) prices to overshoot to the $90 a barrel range as shorts pile in before recovering a little around $93 a barrel at rollover (give or take a couple of bucks in either direction).
It is just not Cushing, the total U.S. supplies rose for the 10th time in 11 weeks, up another 2.9 million barrels for the March 25 week to 355.7 million (Fig.2). Remember during the summer when oil prices were in the low $70s? Well, inventories were at the height around 368 million barrels, which became a big headwind for long only speculators in crude oil at the time.
Demand Destruction by High Oil Prices?
So, here we are--only 12 million barrels from that exceedingly bearish level of US storage. And with these high prices we are starting to experience legitimate demand destruction. It seems with these high prices it is only a matter of time before we are again at the 368 million barrels of oil in US storage facilities at the Commercial level. So the Oil Bulls can no longer point to Cushing as an anomaly, we are literally swimming in Crude Oil right now in the US.
What’s Up with Rising Imports?
The news gets even more bearish for the Brent crowd as the following question should be asked regarding rising imports which are at their highest level in two months, at 9.1 million barrels per day--If there is such a tight supply in crude oil internationally, i.e., reflected in a much higher Brent premium to WTI, then why are imports rising when the US already has sufficient supply right now?
The reason is that there is no other place for this oil to go, especially with Japan`s massive cutback due to a natural disaster which has severely hampered much of its manufacturing, supply chain infrastructure, and domestic demand. All of this portends for continued higher import numbers for the next couple of months until Japan starts ramping back up to normal Oil demand statistics.
Logic Says …..
Unfortunately, Brent doesn`t actually have easily discernible inventory numbers, but through logical deduction one can surmise that if supply were really as tight as the price suggests, then imports to the US market would actually be significantly down, and not up. So expect Brent to come in as well over the next month. (Maybe in the range of $105 to $107 a barrel).
High Prices Kill Demand
With regard to the product side, gasoline inventories fell 2.7 million barrels to 217.0 million (Fig. 2) for the sixth straight weekly draw as there was a period at the beginning of the year where we had a succession of inventory builds in gasoline products. The draw reflects decreasing refinery output, at 8.7 million barrels per day for the lowest rate in almost three months.
Refineries are cutting output as gasoline demand weakens in direct correlation over the last month due to higher prices at the pump, down 0.1% for the first negative year on year reading since the beginning of February.
This is a prime example of economics with regards to higher prices affecting consumer`s driving behavior, enough to lower demand for the product in the market. There is a slight lag between the RBOB futures price and the price paid at the pump, so expect demand to even go down further as gasoline prices fully manifest the appreciation in the futures market.
Down Goes The Pump Price
There is some good news for consumers in all of this as oil prices correct down over the next month; prices at the pump will start to go down as well. It is really the only way to get the consumer demand numbers back up and positive year on year which is necessary to work off these large inventory numbers in crude oil storage.
Correct Now or Collapse Later
The consumer and the US economy needs lower prices to grow at a significantly higher rate in order to make a dent in an overall saturated oil market. The longer prices stay artificially high, and not reflect true demand in the market, well given the current oversupply situation, the correction when it does occur will be even sharper (For example the 2008 Oil collapse).
The old adage “you can pay now, or pay later” applies to the crude oil market here. You can ignore fundamentals for only so long, in the short term, supplies don`t really matter to traders, but there comes a time when fundamentals in the market supersede political and technical based analysis.
In the end, fundamentals have the ultimate and final say regarding price direction in the market. And over the next month, fundamentals will dictate that Crude Oil prices correct to a lower level from current levels.
This correction would actually be healthy for the oil market, if this fails to materialize, and oil prices stay high with continuing oversupply, and weak demand, i.e., an artificial mismatch between supply, demand, and price, expect an even “healthier” and fundamentally more severe correction when market equilibrium reasserts itself.
Supply & Storage Fundamental Matters
Now that I have your attention, no one can predict where oil prices will actually go as the crude oil market is a complex equation with ever changing variables. However, the purpose of the article is to discuss the developing supply and storage capacity dynamics in the market place.
Some other factors which might help facilitate crude oil`s decline would be the stepping down of Libyan leader Muammar Qaddafi, an early ending to QE2, a strengthening US Dollar, and some profit taking in some of the commodity related funds that include Gold, Silver, and Oil.
As recent fund inflows have helped prop up WTI beyond purely concerns over the unrest in the MENA region, the exact oil price will depend upon some of these other factors. Nevertheless, it seems reasonable to assume that one factor is quantifiable, and that is the supply issues with regard to storage capacity in the US market. Given these dynamics, WTI should close lower than when it started as the front month contract, and that hasn`t happened in a while, with prices being somewhere in the $90s.
Related Reading - Impending Crude Correction By Mass Rollover
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Kind of interesting to see a Chinese try to talk down inflation when a large segment of experts are predicting high inflation, even sans QE3. I guess if the "Jasmine revolution" was successful and there was blood on the streets of Beijing it would be very very embarassing (Loss of face) for American Chinese....
What's the matter Dian, last girl on the Chinese gold deal squad??? Don't worry there's plenty of greasy noodles, poisoned baby's milk, and mercury infested food waiting back in Shanghai for your next visit.
Confucious say "Don't forget to boil the water from the tap and bring personal supply one-ply toilet paper in purse for public toilet"
This is hilarious supply/demand analysis.
Maybe asiablues did not get the mammo that fundies are irrelevant - especially in oil markets.
Why would traders want to take delivery? I would have thought the only people that would want to take delivery of crude would be refiners. Also, I thought the vast majority of WTI futures are settled cash anyway.
Im no expert, but:
1) To realize a calendar spread.
2) Yes, but there are alot of contracts traded.
This is a great analysis with even better graphics. Libya will soon be under control, Japan forgotten, and oil, which is exceptionally prone to mean-reversion for all sorts of reasons, will correct back down. I think $90 is high. The more likely price is something closer to $70 in 90 days.
If the world deflates, the demand world wide will go down for many years. If the world continues to inflate, the demand in China/India will push Brent to 150$. So US market gets more and more "uncoupled' to real world oil market. That would be bizarre. We would see US oil in Cushing then going to China!
Seriously, if the world demand stays where the current decade projections are pointing, we are talking about net world energy needs of 120 million BPD equivalent energy demand by 2025-2030. If we are really into PEAK CONVENTIONAL OIL, and Nuclear gets put on back burner as a result of Fukushima, where does the energy come from to fill the resultant mega-energy GAP?
It can only mean ONE thing : a mad scramble for 'cheap' available energy, diminishing resource base as the rampant population increase of countries aping the Western Model sky rockets... Only one real solution then : WAR!
Unless we MOVE PLANET-WISE into MEGA renewables, Coal/Shale/Orenoco goo VERY FAST.
Here's a case of inflated-price demand-collapse in spite of fabricated supply-reducing actions (MENA).
Same thing that's happening in housing on a larger scale. Inflated-price demand-collapse in spite of fabricated supply-reducing actions (MERS).
Cushing has become a permanent storage for those who need a future assurance of supply. With the contracts in cotanngo, owners can hedge the storage costs. As demand is starting to exceed current world production, and this will get worse with time, there is little risk in this realistic hedge against well known supply risk factors. The new demand circumstance has made the Cushing yardstick a poor indicator.
It might work out, once Cushing is full, that the market goes into backwardation for current refinery production will be denied the hedged oil, rainy day crude.
There is also a technical question involved concerning grade, composition, product results versus the preferred lightest crude grades.
There are some erroneous myths that a lot of commerce occurs by acting on futures contracts delivery or acceptance. However, there are a few speculative idiots which sometimes provide some laughs.
Writer should understand that there is 5 mm bbls of new storage being built. Also the keystone pipeline which opened two months ago dumps directly into the mid-continent and was the reason for the big contango in feb-mch has had some problems.
The rolls of USO and GSCI are all played out and front run by the HFT guys so there is less bang for the buck. The real money maker has been Brent WTI which went to 18 Brent over in March. Blow up Libya drives the int'l crudes like bonny and brent while good old WTI is stuck in Cushing with no way to get to the Gulf. That is why one saw the Gulf Coast refiners get hammered as they were running high priced LLS while the mid con guys made a killing.
Trading the spreads is easier said then done. As one post said open up a commodity account and trade the contango during a middle east war and see how well you sleep. If Saudi goes boom while your eyes are closed your wife is going to have sleeping on the curb.
By the way the arb to move Brent here is, Brent $2 under WTI BRNK vs CLK is trading 10 over not a very bearish supply picture there.
Rather a lot of opinions here informed by a database of experience no longer applicable.
This is a world where WTI has been north of $90 in 3 of the last 4 years, and north of $100 in 2 of those 4. This has never happened before.
Further, how often in history has Brent held onto months of a $10 premium vs WTI. Right. Never.
Forget your databases. They no longer work. This world never existed before, probably because there has never before been a world where global demand was exceeding possible production, with no prospects for anything different until the global economy is again smashed.
Soon.
This is not some playground where we can come back at the next recess and continue the game of kickball. You smash this economy one more time, you will not recognize anything. There will be no dollar. There will be no economy.
To wit, I do not think this is a controllable situation. I think that TPTB are hanging on by a thread. They know the gig is about up though, which makes them even more dangerous than ever. The war is on. It is time.
I no longer care. Cushing got the United States through world war two when the Uboats sank coastal tankers.
But I have eliminated employers more than 10 miles distant so that when 20 dollar a gallon gas finally does hit, we can keep on going as normal.
It is good the USA is stuffed with oil. We might need it right quick if other places quit producing.
Soo.... what do you think?
I read one problem with the Cushing oversupply has something to do with the oil not having anywhere to go (one-way trip, not two-way)?
Despite oil prices going up or down they still would need to find ways to move the oil throughout the country(-ies, Mexico/Canada). Couldn't that mean there is an opportunity in going long on pipelines? I think TransCanada is building out the Keystone XL extension that will head that way, but it might be a one-way trip.
Also, could it be possible that the current spread between Brent + WTI is the forward projection of what you are proposing?
Great article btw, lots of juicy tidbits to think about in the oil supply industry!
Oil will continue to trade inversely to the USD. $200 crude by summer.
Exactly....even if supply increases the drop in the USD could offset any required price declines.
It just means the price will stay the same or go up in the u.s. but some other country will be able to buy cheaper oil.
No wonder I have so many refiners on my watch list. Time to call a geothermal install technician.
I don't agree to anticipate the Oil price dynamics just by looking to the storage capacity.
There are so many factors why oil is rising, and the number of factors increasing the price of oil is more than the number of factors decreasing the price, so simply the price is going up.
I agree there are other factors, but sustained higher OIL prices kills the FED..........
Sustained higher commodity prices OBLITERATES the FED rationale for QEs and that along with the public memory, although largely taken for granted as stupid, but not nearly short enough for the politicos when it comes to remembering PRICE.
The other option which has already been tried; Your FED cheque is in the Mail? Or, direct deposit.
Between potential crude oversupply in the US and the uncertainty surrounding add'l QE, I'm tempted to use this as my que to get out of the entire oil sector now and wait out any potential upcoming energy commodity/equity downturn...before jumping back in again. Welcome to the Saw Tooth Economy.
I will take the other side of this trade. 44 million barrels is half a days use, and with the world in a state of disarray, who knows what tomorrow will bring. Also, fiat is washing away in the sea of finance, and this should continue; unless of course Bernanke has 15 minutes to spend outside of his ivory tower. Even then, an end to QE and a rate rise may not bring a stronger dollar. Who knows anymore?
It's the half of Global consumption/day but twice as much as American consumption/day.
Since we are talking about WTI, comparing it to global consumption is not appropriate.
Touche. It is a few weeks worth of oil. Woh!
You are exactly right about 'who knows anymore?'.........best guess is that the FED knows its credibility, or what remains of Mishkinese to coin a phrase, is up in fucking smoke if inflation skyrockets and along with that goes the political authority out the door.
Who's gonna pay for more Mishkins and Bernanks propped by politico/lobbyists? Are you gonna pay for it, Lennon? Exactly.
Not to lecture, but think about that. If people, in a critical mass stop paying because the believeing suddenly stops what can the govt do about it?
Not much, and best guess is it is closer than we think.
Did I forget to mention the 2-faced Bullards?
Here is another way to put it; if the BOJ and G7 central banks can get the Nikki to levitate 300 points in 1 night on a TEPCO trillions of Yen implousion then it certainly appears probable that the price of OIL can be managed down to $90 if it serves the interest of the staus quo.
So what then? They raise rates? You need DXY 80 something, how are you going to get that? Raise rates? Should I set my stop watch for 15 minutes? Ha! They also need equities to keep rising. Pensions need Dow 11k to break even now. Catch 22, what will the Bernanke do? Tick...Tock...Tick....Tock...
? You can't use money printing as the tool to solve everything and then think that somehow TPTB will be able to manipulate oil downward for any sustained period because it is teh very same money printing which is causing commodities to rise in the first place.
This is another article I don't get.
Storage in Cushing is already 50 million barrels and growing:
http://af.reuters.com/article/energyOilNews/idAFN2827076420110228
In addition, if Cushing was filled, they would just slow down the flow from Canada to Cushing, or ship it out by rail. Canadian oil is not WTI, just like oil from Libya is not WTI. Different kinds of oil have different prices.
Excerpted from your Reuters link"
"Actual usable storage capacity is estimated to be approximately 80 percent of shell capacity due to operational and safety constraints"
52mm bbl x 80% = 42mm bbl, so it may even be less than the 44mm bbl I quoted from a CNBC special interview at Cushing.
If they could rerout or "slow down" the crude oil flow, it would have been done already. New take out capacity at Cushing is being constructed, but it will take 12-18 months at least to get pipelines built.
Globally, there are around 161 oil markers with WTI, Brent and Dubai the 3 major benchmarks. Different markers have different spreads due to grade, transportation costs, and regional differences. But their prices still tend to move in-sync. So, if WTI and Brent correct, the other markers will likely react accordingly as well.
There will not be a "slow down" of oil deliveries when the price is above $100/bbl. The producers are getting rich and will let you have all you want. When you have all that you can store, what will you do with any additional oil? Crude oil cannot really be stored for more than three or four months without pressure and has to be rolled out and replaced. Eventually it will come to market.
Dian, thank you for the great post - outstanding work! I read your previous article & despite the geopolitcal instability the price of oil did indeed dip under $100/barrel - although your target was not hit exactly due to the risk premia your assessment was & continues to be rock solid - it is a privilege to read your work - thank you again & continued success!
The inflation word has to be at the forefront of consumer thinking and it gets HEADLINE reading at the gas pumps and the FED is boxed in on that front for its already over extended credibility.
Probably a decent short given the FED inflation explanantions ad nauseam, and that price has not so far broken higher on all of the MENA unrest.
Nice article.
Don't count those thousands of tankers bobbing around waiting for higher prices.... Guess the move from $75 to $105 showed no buyers
The price move did show buyers. Now they have all that they can store. What will they do with more supply? It will go to the market and get lower prices. That will trigger sales from the excess storage and push prices down further. That is the reason for the possible move down to $85 or so. It is a somewhat short term correction to balance supply / demand. Longer term the demand will take all supply as those Chinese and Indians will want to drive those vehicles.
Sell the physical oil and buy the oil companies / suppliers on the down move reaction.
They will find a way to store it. If they store it in tankers again, that will cut shipments. It is a complex system.
If needed, they could move oil out of Cushing by rail, but it would cost $10 a barrel to get it to the GOM.
The reason it went to Cushing in the first place was that there was no demand at GoM.
But oil didn't rise on a shortage to begin with. In fact, the entire rise in oil prices over te past decade (or perhaps two) can be traced to factors other than supply and demand...and most importantly of late all the money printing by the world's central banks. Sure, oil prices can retreat from their current highs...but as long as the presses keep going, the price of all commodities will continue to rise simply because things of real, fixed value are just that - things of real, fixed value.
Now, if Uncle Ben cuts off the free money, then we might see a sustained drop in prices...
If this were a gold article it would have 50 comments by now.
Yes, but all fifty of them would consist of useless civilian wisdom. It's a good article; makes the case for a contrarian trade; which is the only way to make a living in the commodities market; whether or not it's right; I don't know.
Pairs Trader is right.
Something about asiablues/dian chu just doesnt get it when it comes to contract expiration. Here's her March 4 view:
" It's The Rollover That'll Get Crude
And don’t forget that the humongous United States Oil Fund (USO) is a futures-based ETF that has to rollover as scheduled (from Mar. 8 to Mar. 11). The USO effect, plus the record open interest almost exclusively long and heavy in April, suggest there will likely be a massive rollover starting with USO around March 8, then to all the other market players, when April contracts and options expire."
That was post when April WTI was at about $104. The lowest print between then and April 11 was 99.01. We called that article BS and we call this one the same. Cushing capacity isn't going to be a price making factor in the spot month expiration. Chu needs to open a futures account and get some real time trading experience before she spews her theories on ZH.
Btw, IQ 145, "...a contrarian trade; which is the only way to make a living in the commodities market."
What planet are you from?
If this is a good comment, it would have 50 replies by now.
burn it all to the ground!!! then very bullish!! destructonomics !!
psst Mr. Chu, didn't you get the memo? fundamentals dont matter anymore.
you gotta BTFD!