The canary in the coalmine of an increasingly desperate energy industry just croaked. With "unusual timing" and at "distressed prices," Reuters reports that Phillips 66 - the major US refiner owned by Warren Buffett - dumped crude oil for immediate delivery into Cushing storage tonight. This sparked heavy selling of the front-month WTI contract (to a $26 handle) and crashed the 1st-2nd month spread to 5 year lows.
It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.
“Even the highly adaptive US storage system appears to be reaching its limits,” we wrote, before plotting Cushing capacity versus inventory levels. We also took a look at the EIA’s latest take on the subject and showed you the following chart which depicts how much higher inventory levels are today versus their five-year averages.
And now with Reuters reporting on major US refiners dumping crude, sparking speculation that the move reflected advance warning of looming output cuts amid sluggish winter demand and record inventories...
Front-month WTI collapsed to a $26 handle...
The unusual sales of excess oil crashed the March/April WTI futures spread... One trader described the market as a "bloodbath."
It was unclear how many barrels one of the largest U.S. independent refiners sold, but three traders confirmed at least two deals traded at negative $2.50 and $2.75 a barrel. Two sources said a second refiner was also looking to offload barrels but transactions were not confirmed.
These deals drew notice among traders, who said the prices were distressed and the timing unusual... sending the cash-roll to 5 year lows...
The so-called cash roll, which allows traders to roll long positions forward, typically trades in the three days following the expiry of the prompt futures contract. The trading period for February-March contracts concluded almost three weeks ago.
Since then, however, oversupply has pressured refined products prices lower, and now some grades of crude are yielding negative cracking margins, traders say.
"Midwest margins turned negative after operating expenses last week and forward cracks suggest margins will remain in the doldrums for some time," said Dominic Haywood, an analyst for Energy Aspects in London.
If Phillips 66 does cut refinery runs, it would be the third refiner to capitulate amid record gasoline inventories and negative margins.
Earlier on Wednesday, sources said Delta Air Lines' Monroe Energy refinery near Philadelphia had decided to cut output by 10 percent at its 185,000 barrels per day (bpd) refinery due to economic reasons.
On Tuesday, sources said that Valero Energy Corp was planning to cut gasoline production at its 180,000 bpd Memphis, Tennessee, refinery by about 25 percent.
U.S. Energy Information Administration data on Wednesday showed inventories at the Cushing, Oklahoma delivery hub hit a record 64.7 million barrels last week - just 8 million barrels shy of its theoretical limit - stoking concerns that tanks may overflow in coming weeks.
And so, with the news that Phillips 66 is dumping in apparent size, it appears, as we detailed previously, that BP's warning that storage tanks will be completely full by the end of H1
"We are very bearish for the first half of the year," Dudley said at the IP Week conference in London Wednesday. "In the second half, every tank and swimming pool in the world is going to fill and fundamentals are going to kick in," he added. "The market will start balancing in the second half of this year.”
May be coming true a lot sooner.