Crude oil supplies in the Midwest (PADD II) and the GoM continued moving in opposite directions. As we highlighted in last Thursday’s issue of , oil inventories in the Gulf always disappear in December and then reappear in January. Whereas stocks have dropped in 27 out of the last 28 Decembers, they have increased in 22 of the 27 following Januarys.
Of course, this event in the Gulf is derivative of the tendency of storage owners to minimize inventories for end-of-year tax reporting considerations. Stocks are already down by 11.8 MMbbls (-6.9%) over the last two reports. We obviously do not expect to see a reversal of this trend until next month.
Furthermore, the collapse in the front-end of the NYMEX WTI curve since the start of this quarter is largely responsible for the wave of crude oil that has flooded the NYMEX PADD II complex in Cushing, OK. Since bottoming at a year-to-date low in early October, stocks have increased by 9.01 MMbbls or 35.9%. This move coincides with a trebling of the 1st/2nd month contango.
However, despite this rise, the week could potentially signal a peak. Analysts at are looking at the ratio between front month and second month prices on the NYMEX WTI contract. As the ratio drops, it becomes cheaper to put stocks in storage at the Cushing, OK hub and sell the deferred contract. When the ratio rises, stocks are pulled out of storage and sold on the market. It should be no surprise that as stocks are at a 5 month high, the ratio is at a 5 month low.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.