U.S. crude oil prices surged and futures saw sharp backwardation as inventories vanished from the NYMEX delivery point in Cushing, Oklahoma.
Futures prices for crude delivered in October jumped to $90 a barrel on September 14, from $68 on June 27, as traders anticipated growing shortages of unrefined oil.
The three-month calendar spread from October 2023 to January 2024 narrowed to a backwardation of $2.26 per barrel from just 10 cents, as stocks are expected to continue to deplete.
Calendar spreads are inversely correlated with inventory levels, so increasing backwardation – when spot prices are higher than futures prices – was expected given the rapid reduction in inventories around Cushing.
Until recently, Cushing was the “pipeline crossroads” of the United States, a major storage and logistics hub for the nation’s production and refining system; Inventory changes in this country tend to reflect broader market conditions.
However, over the past decade, pipeline and storage activities have shifted to the Gulf Coast as the U.S. oil industry has become increasingly geared toward exporting crude.
As a result, inventories and prices in Cushing are no longer necessarily representative of broader market conditions.
LOCAL EXHAUSTION
Since late June, Cushing’s supplies have been depleted much more quickly than in other places around the country.
Cushing crude inventories have been depleted by 18 million barrels (-42%) since the end of June, compared to just 14 million barrels (-3%) elsewhere.
Cushing accounted for less than 10% of all national stocks at the end of June, but has since experienced 57% of the total depletion.
As a result, Cushing inventories were 16 million barrels (-39% or -1.05 standard deviations) below the ten-year seasonal average on September 8, with the deficit up just -1 million ( -2% or -0.06 standard deviations). on June 30.
In contrast, domestic commercial crude stocks were still 1 million barrels above the seasonal average on September 8, down from a surplus of 10 million at the end of June.
In Europe, stocks of crude and other raw materials increased by 6 million barrels (+1%) between the end of June and the end of August, according to data published by the European Commission.
Thus, the rapid depletion of inventories at Cushing has forced futures prices and calendar spreads to increase in the United States, but this could exaggerate the tightening of supplies in the rest of the country and around the world.
CREATION OF POSITIONS
U.S. oil stocks are the most visible and closely watched in the world because they are released weekly with a delay of just a few days, while in other countries monthly reports are months behind schedule.
Changes in US inventories are often used as an indicator of the global production-consumption balance due to their greater visibility and timeliness.
Changes in inventory held around Cushing attract even more attention due to its former importance as a logistics hub and its function in the delivery process of NYMEX futures contracts.
Hedge funds and other money managers responded to the depletion of stocks and rising prices by reducing old bearish short positions and establishing new bullish long positions in U.S. crude futures and options.
Short positions were reduced by the equivalent of 111 million barrels (-65%) between June 27 and September 5, according to position records filed with the U.S. Commodity Futures Trading Commission.
Long positions on WTI futures were strengthened by the equivalent of 68 million barrels (+32%) compared to the same position.
As a result, the net position in WTI jumped to 225 million barrels (42nd percentile for all weeks since 2013), from a record low of just 46 million barrels.
Hedge fund purchases anticipated, accelerated and amplified the rise in US crude prices as the investment community attempted to position itself for a period of shortage.
Fund positions tend to be concentrated in contracts closest to maturity because they offer the greatest volatility and liquidity, so purchases have accelerated the rise in spot prices and progressed toward steeper backwardation .
IN WHAT REPRESENTATION?
Saudi Arabia and its OPEC+ allies have cut production by more than 1 million barrels per day since early July, in a bid to reduce global inventories and drive up prices.
The cuts removed a total of 85 million barrels from the market in July and August and will reach 245 million by the end of 2023 if fully implemented.
Saudi Arabia has diverted the remainder of its exports from North America to Asia through differential increases in its official selling prices.
This strategy reserves a larger share of the export reduction for refiners in Asia, strategic partners who purchase guaranteed volumes on long-term contracts.
Simultaneously, this reduces the flow of crude to North America, the quickest way to have a visible impact on global inventories given that U.S. inventories are released weekly.
The question remains why stocks in Cushing have declined much faster and more than in the rest of the United States.
Stocks around the NYMEX delivery point tend to be more volatile than stocks nationwide, so the discrepancy is not unexpected.
It is possible that Cushing’s stocks could be liquidated to compensate for reduced flows from Saudi Arabia and other Middle Eastern exporters.
But it is also possible that one or more traders intentionally liquidate their stocks in Cushing to accelerate the recovery and move into strong backwardation.
Source: Reuters (edited by Mark Potter)
