Oil supplies at Cushing, Oklahoma, the delivery point for U.S. futures contracts, surged to a record last week, fueling speculation that prices already near a six-year low will fall further as the nation’s storage tanks fill up.
Stockpiles rose 2.87 million barrels in the seven days ended March 13 to 54.4 million, the Energy Information Administration said Wednesday. That’s the highest since the agency began tracking inventories at the hub in 2004. Cushing supplies have soared 69 percent this year as the shale boom boosted U.S. production to the highest in three decades.
“U.S. crude supply builds, particularly at Cushing, are unambiguously bearish,” Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone. “There is room elsewhere but at Cushing the situation is tight any way you slice it.”
West Texas Intermediate oil for April delivery rose $1.20, or 2.8 percent, to settle at $44.66 a barrel on the New York Mercantile Exchange. Futures dropped to $42.03, the lowest level since March 2009, before rebounding on speculation the Federal Reserve will raise interest rates at a slower pace than previously estimated.
An oversupply of oil in the U.S. has pushed contracts for April delivery $12.42 below those a year out, a structure known as contango. When the price difference is greater than the cost to lease tanks, traders can profit by storing oil and selling the higher-priced contracts for future delivery.
“This could damage the WTI contract,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “We’ve dealt with shortages and seen prices spike as a result in the past. This is something new, the prospect that tanks will fill to capacity, putting tremendous downward pressure on the contract.”
Cushing had 19 million barrels of additional storage space on March 6, Wittner wrote in a report.
The spread between WTI and Brent crude, the benchmark for more than half the world’s oil, widened today. Brent for May settlement rose $2.40, or 4.5 percent, to $55.91 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $9.26 premium to May WTI, up from $8.32 at Tuesday’s close.
The Cushing supply gain “augurs for a greater discount on the contract and a steepening of the contango structure.” Kilduff said.
Nationwide crude inventories grew 9.62 million barrels to 458.5 million last week, the most since the EIA began compiling the data weekly in 1982. Supplies have grown 76.1 million barrels, or 20 percent, in 10 weeks. Monthly data going back to 1920 show stockpiles haven’t been this high since 1931.
Crude stockpiles in the Midwest including Cushing, known as PADD 2, advanced to a record 138 million. Inventories along the Gulf Coast, home to about half of U.S. refining capacity, also surged to an all-time high last week. Supplies in the region, known as PADD 3, rose 3.27 million barrels to 225.7 million.
“We need to see spreads widen to incentivize the movement of more barrels from Cushing to the Gulf Coast and deincentivize imports,” Matt Sallee, who helps manage $17.7 billion in oil- related assets at Tortoise Capital Advisors in Leawood, Kansas, said by phone. “Imports from Canada make sense but that’s not the case with those from the Middle East and Nigeria because they have to sell at a discount here. That will change since the cargoes that arrived last week were set in motion months ago.”
Imports of crude rose 703,000 barrels a day to 7.5 million last week, the highest level this year, the report showed.
Crude output rose 53,000 barrels a day to 9.42 million, the most since at least January 1983 when the EIA began tracking weekly production. The combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the central U.S.
The falling drilling rig count and a rise in refinery activity will reduce stockpiles later this year, Sallee said. Drillers in the U.S. have idled 709 rigs since the start of December, data from Baker Hughes Inc. show. The number of active machines seeking oil was 866 as of Friday, the lowest since March 2011, according to the services company.
Refineries operated at 88.1 percent of their capacity on March 13, up from 87.8 percent the prior week. U.S. plants typically schedule work for late winter, when they move from maximizing distillate output to producing gasoline.
“The drop in rigs is going to lead to lower production,” Sallee said. “We’re already coming out of turnaround season and will be operating from 90 to 95 percent of capacity soon, which will alleviate the weekly builds in supply. This will be a huge shift for the domestic crude market.”
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