Yes, yes - oil is falling. Nymex WTI is sub $40 per barrel.
But the case of Cushing is becoming increasingly important in regards to the pricing of the contract. Cushing, in Oklahoma, is the delivery point for Nymex WTI, which means anyone who wants to take physical delivery must have access to storage at Cushing. Of course, Cushing has a limited capacity. Also, oil can only flow in one direction out of storage there. As a result it can get bottlenecked relatively easily if demand for storage is elevated. This becomes increasingly likely when there is a contango in the market because the dynamic encourages oil storage.
Of course, we’ve seen this before - the last time a super contango was apparent in the market was back in April 2007. As a result, WTI became increasingly disconnected from Brent as well as other US crude grades like Mars.
It seems the problem may be re-emerging according to JBC Energy (our emphasis):
The latest inventory data will also give more direction to WTI, which slumped recently compared to other crude benchmarks. In the physical market, the WTI 1st Mth/Brent 1st Mth spread widened to almost -$7.80 per barrel, down from strong premiums of more than $6 per barrel a month ago. This can be mainly attributed to increasing inventory levels in Cushing (PADD II), the delivery point for the Nymex Light Sweet Crude Oil Contract. Stocks were last seen at around 27 million barrels, up by almost 10 million barrels from early November. A similar situation was also observed in April and May 2007, when crude stocks in Cushing climbed to a record 28 million barrels, which resulted in the WTI 1st Mth/Brent 1st Mth spread widening to -$7.90 per barrel. WTI lost its connection to the USGC market in both occasions, with grades such as light-sweet LLS rising to a premium of around $4.50 per barrel to WTI, up from around 50 cents per barrel at the beginning of the month. Sour grades such as Mars and Poseidon also improved strongly in the last few days (see EMR of December 22). Finally, low WTI levels resulted in healthy low sulphur fuel oil cracks on the USGC, which have flipped into positive territory for the first time in five years.Essentially that means once Cushing storage nears capacity WTI will become increasingly depressed versus other crude grades and therefore disconnected from real oil supply/demand fundamentals. As a result it will no longer be a good indicator of US crude prices.
Related links:
Rollover, rollover WTI - FT Alphaville
Profiting from a contango, not so easy - FT Alphaville
