U.S. Crude Oil Prices Surge as Inventories Deplete at Oklahoma Delivery Point
London, Sept 15 (Reuters) – U.S. crude oil prices have experienced a significant surge recently, with futures prices for crude delivered in October reaching $90 per barrel on Sept. 14, up from $68 on June 27. This increase in prices is due to traders anticipating a growing shortage of unrefined petroleum.
The surge in prices has coincided with a sharp backwardation in the futures strip, as inventories have drained away from the NYMEX delivery point at Cushing in Oklahoma. The three-month calendar spread from October 2023 to January 2024 tightened to a backwardation of $2.26 per barrel from just 10 cents, indicating the expectation of further depletion in inventories.
The increasing backwardation, where spot prices are higher than forward prices, is a result of the rapid drawdown of inventories around Cushing. Until recently, Cushing was a major storage and logistics hub for the U.S. oil industry. However, in the last decade, pipeline and storage activity has shifted to the Gulf Coast as the industry has become more focused on exporting crude.
As a consequence, inventories and prices at Cushing are no longer representative of market conditions on a wider scale. Since the end of June, Cushing has seen inventories deplete much faster than other locations in the country. Stocks at Cushing have depleted by an impressive 18 million barrels (-42%) since June, compared to just 14 million barrels (-3%) elsewhere.
This rapid depletion of inventories at Cushing has forced U.S. futures prices and calendar spreads higher. However, it may be exaggerating the tightness of supplies across the rest of the country and globally. Data from the European Commission shows that crude and other feedstock inventories in Europe have actually increased by 6 million barrels (+1%) between June and August.
U.S. petroleum inventories are closely watched globally because of their weekly reporting and timeliness. Changes in stocks held around Cushing receive even more attention due to its former importance as a logistics hub and its role in the NYMEX futures delivery process.
Hedge funds and other money managers have responded to inventory depletion and rising prices by reducing bearish short positions and establishing new bullish long ones in U.S. crude futures and options. Short positions were cut by the equivalent of 111 million barrels (-65%) between June 27 and Sept. 5, while long positions were boosted by the equivalent of 68 million barrels (+32%). Consequently, the net position in WTI (West Texas Intermediate) climbed to 225 million barrels, up from a record low of just 46 million barrels.
Hedge fund purchases have played a significant role in driving up U.S. crude prices, as investors position themselves for a period of shortages. Fund positions are typically concentrated in contracts closest to maturity, which offer the greatest volatility and liquidity. This buying activity has further intensified the rise in spot prices and the move towards steeper backwardation.
Meanwhile, Saudi Arabia and its OPEC+ allies have implemented production cuts since July to reduce global inventories and boost prices. These cuts have already removed 85 million barrels from the market in July and August, with a total reduction of 245 million barrels expected by the end of 2023 if fully implemented. Saudi Arabia has also redirected its remaining exports away from North America and towards Asia, further impacting global inventories.
The significant depletion of inventories at Cushing compared to the rest of the United States raises questions. While inventories around the NYMEX delivery point tend to be more volatile, it is possible that Cushing inventories are being liquidated to compensate for reduced flows from Saudi Arabia and other Middle East exporters. However, it is also possible that one or more traders are intentionally liquidating inventories at Cushing to expedite the rally and shift to a strong backwardation.
It is important to note that the views expressed are those of John Kemp, a Reuters market analyst.
More detail via Reuters here… ( Image via Reuters )