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Cushing Crude Oil Inventories and Super Contango

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Cushing crude oil inventories

The latest data from Genscape estimate that Cushing crude oil inventories rose by 0.441 MMbbls (million barrels) for the week ending November 25, 2015. Cushing, Oklahoma, is the delivery point of crude oil futures contracts traded on NYMEX (New York Mercantile Exchange). It is also the largest storage hub in the United States. A rise or fall in Cushing crude oil inventories influences crude oil prices.

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EIA: Cushing crude oil inventories

The EIA (U.S. Energy Information Administration) reported that Cushing crude oil inventories increased by 1.7 MMbbls to 58.6 MMbbls for the week ending November 20, 2015, as compared to the week ending November 13. That was the third straight week that Cushing crude oil inventories rose. Between October 30 and November 20, Cushing inventories rose a total of 5.4 MMbbls due to new pipelines coming online. The major pipeline infrastructure provider in this region is the Keystone Pipeline. It’s owned by TransCanada (TRP).

Likewise, the EIA reported that nationwide US commercial crude oil inventories rose by 1 MMbbls (million barrels) to 488.2 MMbbls for the week ending November 20, 2015. Rising inventories in Cushing and across the nation should put pressure on crude oil prices. Thus, in the short term, we could crude oil prices fall further.

Super contango

The positive spread between short-term and long-term futures contracts is called contango. Contango happens when producers start storing oil because they think demand and prices will rise. As a result, inventory rises. The wider contango, or super contango, makes it economically viable for oil producers to store oil in super tankers or other sources.

As a result, wider contango and record inventory benefit oil tankers such as DHT Holdings (DHT), Teekay Tankers (TNK), and Frontline (FRO). The spread between US benchmark January WTI (West Texas Intermediate) 2016 contracts and January 2020 contracts is $15.54 per barrel. Market surveys estimated a storage cost of $1.10 per barrel in March 2015 to store oil on VLCCs (very large crude carriers). Surveys suggest that massive oil from both land and offshore operations will lead to further stress on the market.

The roller coaster ride in the energy market also impacts ETFs such as the PowerShares DB Oil Fund (DBO) and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).

In the next part of this series, we’ll look at how the holidays drive demand in the oil market.

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