Six months ago, oil was going out the door like hotcakes.....now we don't have room to store the surplus. I must remember to keep saying....free markets are efficient, free markets are efficient, free markets.......
New York Oil Falls as Stockpiles at Cushing, Oklahoma, Climb
By Mark Shenk
Dec. 19 (Bloomberg) -- Crude oil dropped below $33 a barrel in New York as rising stockpiles at Cushing, Oklahoma, leave little room to store supplies for delivery next year.
Supplies at Cushing, where oil that’s traded in New York is stored, rose 21 percent to 27.5 million barrels last week, the highest since May 2007, the Energy Department said on Dec. 17. OPEC’s biggest output cut in more than a decade this week failed to stop a price drop as the recession sapped demand.
“At this stage it’s not what OPEC is doing that moves the market; instead it’s the big builds at Cushing,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York.
Crude oil for January delivery fell $3.05, or 8.4 percent, to $33.17 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $32.40, the lowest since February 2004. The January contract expires today. The more-active February contract rose 69 cents, or 1.7 percent, to $42.36.
It’s the biggest premium between the two most-active contract months in Bloomberg data going back to 1986. The spread allows oil traders who can line up credit and storage space to lock in profits by buying and holding crude oil to sell a month from now.
“If you have access to storage, there’s every incentive to take delivery because it’s a great way to make money,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “Nobody wants to take delivery now because there’s no place to put the oil.”
Contango
This price structure, in which the subsequent month’s price is higher than the one before it, is known as contango. A market in contango encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 11 of the past 12 weeks, according to the Energy Department.
“Contango is the word of the day,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut. “If we didn’t have expiration today, we probably wouldn’t have fallen below $40.”
Crude inventories in Cushing may increase to full capacity within “a matter of two or three weeks,” Barclays Capital analysts led by Paul Horsnell said in a research note Dec. 17.
The Organization of Petroleum Exporting Countries, which pumps 40 percent of the world’s oil, agreed on Dec. 17 to cut output by 2.46 million barrels a day starting Jan. 1 in an effort to bolster prices, which have slumped 37 percent this month.
“The scale of the cuts is quite significant,” said Rachel Ziemba an analyst at RGE Monitor, an economic research company in New York. “With oil at $35, members can’t balance their budgets. OPEC will find it hard to do more than they’ve already promised.”
Possible Meeting
OPEC may meet again in Kuwait on Jan. 19 to discuss further production cuts, Chakib Khelil, the president of the group, said today. OPEC will continue reducing output as demand falls, Khelil said in an interview in London.
“Despite the efforts that OPEC has made, prices haven’t recuperated sufficiently,” Venezuelan Finance Minister Ali Rodriguez told reporters today in Caracas. “Certainly once again there will have to be additional efforts.”
World oil consumption next year will drop by 0.2 percent to 85.68 million barrels a day, OPEC said in a Dec. 15 report. The U.S. Energy Department said on Dec. 9 that global demand will decline 0.5 percent to 85.3 million barrels a day.
Spare Capacity
Spare production capacity in the oil industry may more than double through 2012, because of falling oil demand and new supply from investments already being made, said Cambridge Energy Research Associates.
Excess capacity may rise to 8 million barrels a day from 3 million a day this year, according to Cambridge, Massachusetts- based CERA’s estimates published in a report for delegates at the London Energy Meeting, which included representatives from 27 oil consuming and producing nations.
Fog forecast for coastal Texas today may prolong the closure of the ship channel used to supply crude oil to local refineries. No ships entered Galveston Bay, which includes the ports of Houston, Galveston or Texas City, overnight, U.S. Coast Guard spokeswoman Julie Miller said.
Brent crude oil for February settlement rose 79 cents, or 1.8 percent, to $44.15 a barrel on London’s ICE Futures Europe exchange.
“The rally today in Brent futures may be a bellwether of what will happen here next week,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “When a contract expires at an extreme high or low, sometimes the successor month follows. I don’t think there’s a high probability we will retest these lows next week.”
Bets that February oil will fall below $40 a barrel were the most active options in New York today. February $40 puts declined 12 cents to $3.30 a barrel, or $3,300 a contract, on volume of 569 lots in Nymex electronic trading. One contract is for 1,000 barrels of oil.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.
Last Updated: December 19, 2008 14:53 EST
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