| NEW YORK/HOUSTON
NEW YORK/HOUSTON 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.
In the Houston area, traders that took out storage at the height of capacity issues in 2015 at around $1.20 a barrel are finding it no longer economical.
In the Louisiana Offshore Oil Port (LOOP), the only deep-water U.S. oil port and a major conduit for the country’s crude oil imports, drawdowns have been reflected in the costs of storing oil, traders said.
The futures contract for oil storage there LOSc1 has fallen to around 40 cents per barrel, down about half in a month and still double the difference between front- and second-month crude prices.
One of the most expensive storage options is to hold oil on tankers at sea. During the massive build up in inventory through 2015 and 2016, even some of that was profitable.
Floating storage is now falling. In the U.S. Gulf, crude in offshore tankers fell to 26 million barrels last week from 35 million barrels a month ago, according to data provider ClipperData.
Not all of that crude was considered to be held in floating storage. Some of it may have simply been waiting to discharge.
The largest, and typically cheapest, U.S. storage facility is in Cushing, Oklahoma, which is also the delivery point for West Texas Intermediate (WTI) futures contract CLc1, one of the world's two most important benchmarks for oil prices.Even at Cushing, market participants are emptying storage. Stocks have fallen on average by more than 600,000 barrels per week since the end of 2016, and analysts expect another two to three million barrels to empty out in March.
The going rate for putting oil in tanks in Cushing is around 35-50 cents per barrel per month, though some secured cheaper space still considered profitable before the oil price rout began in mid-2014.
Even as traders sell from the pricier storage tanks, total inventories in the United States have reached a record level. [EIA/S]
That build up is likely due to high imports that were booked before the OPEC production cut, traders and analysts said. It takes around six week for crude from the Middle East to make its way to the United States, and further shipments should fall in coming weeks.
"There is unlikely to be much more of a tail to the increased flow from the Middle East into the U.S.," Paul Horsnell, global head of commodities research at Standard Chartered, said in a note.
Stocks have also built because refineries are piling up inventories during their seasonal maintenance periods. As they return ahead of summer demand season, inventory builds should reverse.
Record exports of U.S. crude in February and March, particularly to Asia, are also expected to boost prices and encourage shipments from storage.
Exports from the United States hit a record high of 1.22 million barrels per day (bpd) last week and domestic production rose to above 9 million bpd, the highest since April, the U.S. Energy Administration Agency said.
"With those two together, the U.S. is becoming an export juggernaut," said John Kilduff, partner at New York energy hedge fund Again Capital.
(Reporting by Catherine Ngai in New York and Liz Hampton in Houston; Editing by Gary McWilliams, Simon Webb and Marguerita Choy)