While oil bulls were delighted by yesterday's DOE news of an inventory drawdown refuting the prior day's API news of a major build, what was ignored was the build in Cushing storage (more on that shortly), which according to Genscape hit a utilization just shy of 80%, or more than 70 million barrels, a record high since Genscape began monitoring the hub in 2009. To be sure, the risk of running out of land storage has been one we have previously discussed on various occasions and hinted that one way this is being circumvented is with substantial amounts of oil being stored on tankers at sea, mostly by commodity trading companies who take advantage of the oil contango to generate month to month profits as producers choose to keep their product away from the market until prices rise.
As it turns out, not only is this the case, but according to Reuters, one particular energy trader - a name well-known to Zero Hedge readers - Glencore, has built up a massive inventory stake in the Brent market where it now holds an unprecedented 30% position in Brent, which it is holding for offshore storage in its tankers in hopes of pushing the price of Brent, and thus the entire energy complex higher, by limiting supply.
As Reuters details, citing trade sources, Glencore has built up one of the largest positions in part of the Brent crude market which acts as a benchmark for global oil prices since the start of the year.
For those unfamiliar, the Brent market is based on four North Sea crude oils - Brent, Forties, Oseberg and Ekofisk, or BFOE. And, according to Reuters Glencore is quietly cornering the Brent market, by holding more than a third of the 37 BFOE cargoes loading in June and is expected to acquire more.
The report details that Glencore has been acquiring June BFOE cargoes through the "chains" - a forward market in which cargoes soon to be assigned loading dates are traded, according to trade sources citing data from pricing agency Platts.
"It's definitely a bold statement of market view by Glencore," said a trading source with another company operating in the North Sea. "You'd have to be in their heads and in their books to know exactly what's going on."
To be sure, Glencore has been alleged to "warehouse" oil previously, most recently in January when Bloomberg reported that "Glencore is said to be storing oil on ships off the coast of Singapore and Malaysia as a market structure known as contango allows traders to benefit from holding on to supplies for sale later. The commodities trader has at least 4 very large crude carriers, each of which can hold about 2 million barrels, floating at sea off the nations’ coast in Southeast Asia."
However taking advantage of contango for contango purposes is one thing. Attempting to corner the entire market is something entirely different, and has direct implications on the price of oil, something Glencore can further benefit from if it were to be concurrently long Brent.
According to Reuters, just under half of June's supply of the four benchmark crude grades amounts to nearly 10 million barrels of oil - over 10 percent of daily world production. "Glencore have got big positions all over the place in BFOE," said another North Sea trading source. "They are consistently keeping cargoes in the chains."
The company has taken this position as supply underpinning the Brent contract is set to be smaller than in a typical month. In June, output of the BFOE crudes will fall to 740,000 barrels per day - the lowest in almost two years - mainly because of maintenance at Ekofisk oilfields. This, say analysts, helped Brent futures for June delivery strengthen against the July contract and eventually trade at a premium - a structure known as backwardation and unusual when supply is generally ample.
It also means that Glencore was likely losing money on the actual month to month roll of its inventory, however it was more than offsetting losses if it was concurrently long Brent as removing 30% of the overall market supply has certainly pushed the price of Brent notably higher.
Reuters sources agreed with this assessment: "Glencore have obviously been very bullish," the first trade source said. "Part of the explanation would be that they recognised there would be next to no Ekofisk around and the North Sea market would tighten up. So, why not?"
Why not? Well, because to some this stockpiling reeks of manipulation of the price by keeping a major amount of monthly supply off the market. And snce Brent and WTI tend to trade largely in tandem, the answer to "why not" is because millions of consumers would end up paying far more at the pump than if Glencore was not choking supply just to boost its own earnings.
One way to see the impact of this may be to look at the strip which both in Brent and WTI has flattened substantially as can be seen on the chart below, as prompt month manipulation by the likes of Glencore pushes spot higher even as hedgers and long-term investors continue to sell the long end on expectations of declining future prices.
With the expiry of the June Brent futures contract at the end of April, the spread between the first-month Brent contract moved to a discount to the second month, known as contango and a more typical structure when supply is ample.
Trading houses such as Glencore, along with rivals Vitol, Trafigura, Gunvor and Mercuria, buy and sell physical commodities, from natural gas, to copper or crude oil, moving millions of tonnes of raw materials around the world each year. But because there are a small number of participants in the Brent market and it is far easier to manipulate the price, and it is therefore both not uncommon, and in fact frequent, for them to take large positions, which sometimes lead to unusual patterns in related physical and paper markets, according to other traders.
Glencore is not the first one who has done this: in January, Shell accumulated a large number of Forties cargoes and was expected to ship many of them to South Korea. This coincided with the last time the first-month Brent contract traded in backwardation to the second.
As for the market impact on both Brent (and indirectly WTI) it is elementary finance that when supply is throttled, the equilibrium price will rise substantially, as has been the case in recent weeks.
Finally, one question remains: who benefits? Well, one look at the net spec Brent long position shows that someone has been very bullish the Brent price. In fact, as of the past few weeks, net specs longs have never been higher.
And now that we know which trader has been cornering the Brent physical market, we can also make an educated guess which (same) trader has also made huge profits by betting on the recent surge in the price of Brent. Which, since the (same) trader controls the actual supply of Brent, is about as close to a "no-brainer" trade as we have ever seen.