(Bloomberg) — Crude tanks at the largest US storage hub and the pricing point for millions of dollars worth of oil contracts are running dry, threatening their ability to operate normally and sending prices for near-term supplies surging.
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Stockpiles at Cushing, Oklahoma — the delivery point for benchmark US crude futures — tumbled below 22 million barrels last week, the lowest since July 2022, according to government data released Wednesday. Stockpiles have dropped for seven straight weeks and and now sit just above seasonal lows last seen in 2014. At these levels, many traders consider inventories to already be at the lowest levels that allow tanks to function normally.
The situation is forcing some traders to pay up big for last-minute supplies at Cushing. The prompt futures spread, which closely tracks supply and demand at the site, surged above $2 a barrel on Wednesday, the highest since July 2022.
However, the US refinery maintenance season is getting underway, likely preventing the storage hub from draining to absolute lows. Still, exports remain a wild card for balances, given that demand for American oil is high amid OPEC+ supply curbs, meaning domestic users will likely have to pay up to keep barrels in the US.
Operationally, pulling oil out of tanks when levels fall below the so-called “suction line” is difficult and expensive, and the quality of crude can be compromised by the presence of water and sediment.
For now, traders are expecting stockpiles to halt their decline by October and possibly start building up again, depending on how exports shape up. Indeed, this week’s drawdown was less than 1 million barrels — the first time that’s happened since early August.
Cushing’s role in global oil markets has also diminished in recent years since the US lifted an export ban. Most barrels now flow straight from the prolific oilfields in Texas’ Permian Basin to the coast, where they are shipped to overseas buyers.
“Cushing can stay at minimum operating operating levels for an extended period of time,” said Scott Shelton, an energy specialist at ICAP. “It’s now a transit point to the US Gulf Coast and a supply point for Cushing-based refiners.”
The latest surge in US crude spreads also fueled a jump in Brent spreads, with the prompt spread climbing above $2 as well, to the widest in a year. But a correction may be coming soon, traders and analysts said.
“Considering the crude oil market is heading toward a heavy maintenance season and the pace of the stock draws is clearly moderating from the exceptional 3 million b/d rate recorded last month, it appears Brent prompt spreads have overshot their supply-demand fundamentals,” Citigroup Inc. analysts including Ed Morse wrote in a note.
“The foreign pull on US barrels as they became part of the new Dated Brent physical settlement basket is triggering a troublesome feedback loop between the two crude oil benchmarks,” they wrote.
–With assistance from Julia Fanzeres, Lucia Kassai and Alex Longley.
(Adds detail on Brent spreads starting in ninth paragraph.)
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Source: finance.yahoo.com