April 28, 2009 / 9:35 PM / in 8 years

UPDATE 1-Crude oil contango may flatten in second quarter

NEW YORK, April 28 (Reuters) - Energy companies that have reaped huge profits from a steep contango in the U.S. crude market by pumping millions of barrels of oil into storage since autumn said on Tuesday the curve may flatten in the second quarter, prompting them to drain their tanks.

British oil major BP Plc (BP.L) which owns almost one fifth of crude oil storage at the huge Cushing, Oklahoma facility reported first-quarter supply and trading contributions to earnings were almost $500 million higher than what would be considered normal because of the contango.

A contango market structure occurs when prices for delivery out into the future rise above nearby-by supplies, making it economical for a company to store oil instead of refine it.

“We have now seen the sharp, steep structure we had in the first quarter return to a flatter structure,” Byron Grote, BP chief financial officer, said during the earnings conference call.

The contango has narrowed from the $5 and 6 dollars per barrel seen earlier this year to about a $1 per barrel now, and despite almost record low storage costs, it is unlikely that more oil will be going into storage.

“And as a consequence, we don’t anticipate that this level of contribution is likely to persist in subsequent quarters. We would actually expect (supplies in storage) to be probably drawn off during the course of the second quarter,” he said.

Cushing is the world’s largest crude oil storage facility with some 47 million barrels of capacity. It is also the delivery point for crude futures contracts on the New York Mercantile Exchange.

Canada’s fourth-largest independent oil explorer Nexen Inc NXY.TO, which also has storage facilities at Cushing and at Hardisty in Alberta, also reaped the financial benefits of the contango.

Speaking to reporters at the company’s annual meeting, Marvin Romanow said his marketing unit generated C$83 million ($68 million) in cash flow in the first quarter, much of it due to the company’s storage of oil to take advantage of contango, a strategy still in use.

”That’s a good strategy to have. It’s low risk because if the environment doesn’t present itself and you don’t have that curve, you don’t put the barrel of oil in the tank.

”This has been such a common strategy that people have filled up virtually all the fixed storage around the world and they’ve now gone to floating storage to do that as well.

“But the shape of the forward curve will change and as it moves down we’ll store less oil, we’ll use the tankage that we have to follow blending strategies that will allow us to make a return.” ($1=$1.22 Canadian) (Reporting by Janet McGurty; additional reporting by Jeff Jones in Calgary; Editing by Marguerita Choy)

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