13 June 2016, New York — Oil traders at the U.S. storage hub in Cushing, Oklahoma are betting stocks will fall by the most in early autumn, due to the twin effect of declining Canadian supplies and strong Gulf Coast demand.
A big drop in inventories could throw more support behind oil prices that recently surpassed $50 a barrel for the first time since October, and cause the spread between prompt WTI to the second month to tighten.
Those traders are seeing reduced flow on key pipelines headed to the Cushing storage hub, and therefore increasingly betting on tighter supply in coming weeks, and using bullish financial calendar spread options.
Currently, the prompt month is at a discount to the second month, also known as “contango.” That has risen from a low of a $2.90-a-barrel discount in February to around 60 cents this week. This indicates expectations for less supply, driven by a decline in crude coming from Canada following the May wildfires, along with heavy Gulf Coast demand.
Further, options activity suggests traders see that spread continuing to narrow. Open interest for WTI July/August physically and financially settled calls betting on spreads to narrow to less than 25 cents rose by 5,000 lots since the start of June to about 53,000 lots, according to CME Group.
“With the large inventory builds behind us, we expect that deferred prices will start to stabilize,” Goldman Sachs analysts wrote in a recent report.
In mid-May, Cushing volumes reached a record 68.3 million barrels, just 5 million barrels shy of its theoretical limit. Stocks have since fallen by nearly 3 million barrels, according to the U.S. Energy Department.
The falling Cushing inventories are expected as a result of lower flow on the usually highly-subscribed 193,000 barrel per day (b/d) Enbridge Inc Spearhead pipeline and TransCanada Corp’s 590,000 b/d Keystone pipeline, which carry Canadian crude into Cushing.
Traders and producers submit nominations in advance to ship barrels on a pipeline, and the reduced activity is a result of fewer barrels available.
Reduced supply from Canada following May’s wildfires is only starting to appear, due to the three- to four-week lag that it takes to move crude from Alberta into Oklahoma.
In June, the Spearhead line is expected to run by just over 100,000 b/d, according to two traders familiar with the pipeline. Flows on TransCanada’s Keystone pipeline are expected to be around 208,000 b/d, according to a June 7 shipper notice, down by 25,000 b/d from a week earlier.
Stockpiles hovering near record volumes in Cushing are expected to draw by an average of two to three million barrels this month, according to 10 market participants interviewed by Reuters who either trade or closely monitor physical barrels.
That would be the largest monthly draw since September. However, unexpected activity at Cushing-area refiners could alter those estimates, such as this week’s outage at CVR Refining’s 115,000 barrel-per-day Coffeyville refinery in Kansas.
For now, the WTI July/August contango appears to have weakened slightly, widening to 67 cents on Friday from 41 cents at the start of the month.
Traders say a decline in barrels from the north comes as crude flows on Enbridge Inc and Enterprise Product Partners’ Seaway and Seaway Twin pipelines are expected to run fairly steady due to higher demand from Gulf Coast refiners as summer gasoline demand rises.
Gulf Coast refinery outages are expected to decline to just 150,000 b/d in June, versus roughly 400,000 b/d offline in May, a trading analyst who closely monitors maintenance said.
*Catherine Ngai and Liz Hampton; Editing – Chris Reese – Reuters