All inbound and outbound traffic to the Houston Ship Channel remains idle as repairs to a downed power line are completed. On Sunday morning the U.S. Coast Guard halted traffic to the epicenter of the U.S. refining complex after a barge struck a highline electrical tower in Baytown. The channel is estimated to stay closed until this evening.
In the meantime the discount on sour crudes in the Gulf (Mars and Poseidon) narrowed to WTI and the contango on the NYMEX forward curve narrowed by another 19 cents. Since peaking two weeks ago the discount on prompt futures has been sliced in half, from $1.45 on September 21st to 73 cents as of last night.
We suspect that the premium to GoM sours will move back out after the Channel reopens. After all, we are talking about a two day disruption to the flow of oil, during turnarounds.
To wit, refinery utilization in PADD III (GoM) dropped by 360 bps to 86.3% per the latest weekly update from the DOE. Besides, there are 434 MMbbls of sour crude sitting down in the Gulf in the SPR… 57 days worth of GoM refining capacity cover.
Furthermore, overall U.S. supplies of crude oil ended the month of July at a 20-year high, 355.1 MMbbls. As far as the winter goes, supplies of heating oil (?2 > 5×10-4) in the East, the largest (by far) heating market in the U.S., were 13% above their 5-year average.
In other words, we are swimming in seasonal supplies. Yet, the curve on forward prices continues to flatten. That usually only happens when supply concerns arise. But, then again, these are not usual times. For example, in usual times mom-and-pop investors do not own 22 MMbbls of WTI crude oil.
In this vein the crude oil exchange-traded-fund (USO) is set to begin its roll tomorrow. Thus, in between today and Monday we are going to see a lot of selling in the front of the Board and a lot of buying in the back. As such, analysts at The Schork Report present that the table is set for further contraction in the contango. Therefore, if we see it we will understand why. If we don’t, then we do not want to be long crude oil.
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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.