Oct. 26 (Bloomberg) — Oil futures closest to expiration became more expensive than those for later delivery for the first time in three years after U.S. crude stockpiles shrank to a 12-month low.
Supplies in Cushing, Oklahoma, fell on Oct. 21 to the lowest level in a year, according to measurement of tanks using satellite photographs. Storage at Cushing, the delivery hub for New York futures, fell 26 percent by Oct. 14 from an April peak, according to Energy Department data. Total U.S. inventories dropped to the lowest level in 20 months, the department said.
December futures climbed to a premium over January oil on Oct. 24 as the market shifted into backwardation, a pattern it has held 40 percent of the time over the past 20 years, according to data compiled by Bloomberg. As recently as Oct. 21, the later contracts had been at a contango, a condition that began in November 2008 as a recession approached. Prices fell to a four-year low of $33.87 a barrel that December.
“Cushing inventories are now much lower,” David Greely, head of energy research at Goldman Sachs Group Inc. in New York, said yesterday in an e-mail. The move into backwardation developed “as Cushing inventories drew down from their peak in April,” he said.
West Texas Intermediate crude for December delivery dropped $2.97, or 3.2 percent, to $90.20 a barrel on the New York Mercantile Exchange. The January contract fell $2.75, or 3 percent, to $90.18, narrowing the spread to 2 cents from 24 cents at yesterday’s settlement.
Stockpiles held in floating-roof tanks at Cushing dropped 760,000 barrels to 28.1 million on Oct. 21 from Oct. 18, satellite images taken by Longmont, Colorado-based DigitalGlobe Inc. showed. That’s the lowest level since the data started a year ago. The estimate was based on images from all 234 floating-top tanks at the physical delivery point for Nymex futures contracts.
The Energy Department said last week that inventories in floating and fixed tanks at Cushing totaled 31.1 million barrels as of Oct. 14, down from a peak of 41.9 million on April 8. Levels were 8.5 percent lower than a year earlier. The department said today storage rose 419,000 barrels to 31.5 million.
The shift from contango to backwardation took place “at some point over the last few days,” Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut, said yesterday in a phone interview. Cushing inventories are now below “year-ago levels, which wasn’t the case at the beginning of the summer,” he said.
Total U.S. stockpiles fell to 332.9 million barrels in the week ended Oct. 14, the lowest level since Feb. 5, 2010, Energy Department data showed. The department said today inventories rose 4.74 million barrels to 337.6 million.
“The market is facing a lack of physical supply,” Francisco Blanch, the New York-based head of commodities research at Bank of America Corp, said in a report yesterday. “The stars, it seems, are aligned for a rally,” in the next few weeks, he said, adding that oil may surge to $105.
Contango enables investors to lock in profits by keeping crude in storage for later sale. Traders also make profit by simultaneously selling a front-month contract and buying a later month, expecting the gap to widen.
As the market turned into backwardation, those trades became unprofitable, John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said yesterday by phone. Backwardation typically signals a decline in supply or an increase in demand in the near term.
The swing of WTI futures to backwardation may also be linked to hedging by producers, according to Citigroup Inc. A large amount of oil may have been sold for 2012 and 2013, Seth Kleinman, a London-based analyst at Citigroup Global Markets Inc., said in a report yesterday. Producers seek to protect themselves against the risk that prices will be lower in coming years by selling futures to lock in revenue.
The rise of front-month oil in New York has narrowed London-traded Brent oil’s premium to WTI to a 16-week low. The spread between WTI traded on the Nymex and Brent narrowed to settle at $17.75 yesterday after shrinking to as little as $16.02, the smallest gap since July 6. The difference rose to a record of $27.88 on Oct. 14 and was at $18.71 a barrel today.
“People who sold WTI and bought Brent are now closing out the position,” Harry Tchilinguirian, BNP Paribas SA’s London- based head of commodity markets strategy, said yesterday in a phone interview. “I would put less emphasis on Cushing and more on the continuous unwinding of trades on the WTI-Brent spread.”
–With assistance from Grant Smith in London, Mark Shenk in New York and Margot Habiby in Dallas. Editors: Dan Stets, Bill Banker
To contact the reporter on this story: Moming Zhou in New York at firstname.lastname@example.org
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