Traders drain pricey U.S. oil storage as OPEC deal bites

Fri Feb 24, 2017 1:14am EST
 
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By Catherine Ngai and Liz Hampton

NEW YORK/HOUSTON (Reuters) - Traders are turning the spigots to drain the priciest storage tanks holding U.S. crude stockpiles as strengthening markets make it unprofitable to store for future sale and cuts in global production open export opportunities.

That could signal the beginning of the end for a two-year trade play that came about during an international price war and global oil glut. It is also what the world's largest oil exporters wanted to see when they agreed last year to work together in a historic supply cut to end the glut.

From Houston through Louisiana to floating storage in the Gulf of Mexico, traders are starting to ship crude out of inventories as the rising price of oil for near-term delivery erodes the profits to be had by holding onto oil for later sale.

To be sure, shipments from storage have so far made only a small dent in record U.S. crude inventories. But if prompt oil prices continue to strengthen, more storage will empty out.

"Right now, traders aren't incentivized (to store)," said Sandy Fielden, director of oil and products research at Morningstar.

"It won't all stampede out of the gate, but inventory levels will come down. What will happen is that some of it will go to refineries, but a fair amount will be exported too."

To make money by holding crude, the spread between oil prices for future months needs to be wide enough to cover the cost of leasing tank space and borrowing the money to buy the fuel to fill it. For the last two years, U.S. traders have rushed to that opportunity as those price spreads widened.

Since November, when the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers agreed to cut output, the spread, or discount of prompt barrels to later supplies known as a contango, between the front and second month U.S. benchmark CLc1-CLc2 crude price has narrowed to as little as 26 cents from 95 cents a barrel. That is no longer enough to cover the more expensive storage options, traders said.   Continued...

 
FILE PHOTO - Crude oil storage tanks are seen from above at the Cushing oil hub, appearing to run out of space to contain a historic supply glut that has hammered prices, in Cushing, Oklahoma, U.S. on March 24, 2016. REUTERS/Nick Oxford/File Photo