Pundits have recently been talking about stocks at Cushing, OK and the effects of the Keystone pipeline. They have also been talking about the widening front month spread, which recently crossed below the -$4.00 barrier for the first time since May 2010. However, there is a less discussed effect of Cushing that takes place much further along the curve.
Historically, the red December contract, traded at a discount to the white December contract, that is, traders paid a premium for the closest (white) December and a discount for the next year’s (red) December. This changed with the advent of the contract curve switching from backwardation to a contango—since the pop of the commodity bubble, the white Dec has been trading at a discount while the Red trades at a premium, as shown above.
Yet in today’s issue of The Schork Report, analyst Hamza Khan illustrates a switch back toward negative recently, in November and December 2010. Are we regressing to the historical patterns? Not quite.
For instance, this quarter has seen red Dec trading at a premium for the years 2006, ’07, ’09, ’10 and ’11. Q1 2007 saw Cushing stocks at (then record highs of) 28.01 MMbbls, while 2009 broke that record with a surge to 35.00 MMbbls.
In contrast, 2006 saw Q1 storage at Cushing at just ~22.00 MMbbls, and it was not until Q2, when storage rose to 25.00 MMbbls, that the red Dec’s premium began to widen. 2010 started off the year strongly with stocks at Cushing of 35.67 MMbbls and a red Dec premium of $2.67, but by the end of March stocks had fallen to 31 MMbbls and the spread was just $1.10.
This year, storage at the hub is near record highs at 37.40 MMbbls. If we see further increases, The Schork Reportis advising clients to look for red Dec’s premium to widen regardless of front month WTI strength.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.