NEW YORK - The flattening out of the U.S. oil futures curve may prompt a partial selloff of the plump inventories in the world's top energy consumer by eroding the profits companies gain by storing crude.
Near-month U.S. crude futures have been trading at a steep discount to later months since last November -- a market condition called contango that has enabled companies to earn a profit by storing oil and selling it at a later date for a higher price.
The discount of the front-month contract to the second-month contract, however, has narrowed to around $2 a barrel -- about half the levels seen at the start of February -- and could keep shrinking as OPEC cuts and signs of a recovery in gasoline demand lift near-month prices.
"The belief is that the easy money has already been made in the contango spreads," said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc. "Spreads have narrowed as OPEC cuts are starting to make their way through the market and demand is stabilizing a bit."
Analysts said stockpiles of crude oil held on tankers offshore may be sold first as the curve flattens because of the higher cost of storage. It costs around $1.50 a barrel per month to store crude in tankers, compared to about 75 cents to store crude in tank farms onshore.
"What we see is a reversal pattern moving toward backwardation (when front month futures trade at a premium to later months)," said MacNeil Curry, analyst for Barclays Capital in New York. "The upside we foresee in several weeks time is a (front-month) discount of 25 cents."
STOCKPILES SWELL
There is plenty of oil to sell. Global stocks held on supertankers at sea have topped 80 million barrels, according to top tanker company Frontline.
On land, U.S. crude stockpiles have grown more than 20 percent since last fall due to contango buying combined with slumping demand from recession-hit consumers and businesses, bringing them near an 11-year high of 351 million barrels.
Inventory levels in Cushing, Oklahoma, the delivery point for the New York Mercantile Exchange oil futures contract, have swelled to a record 34.9 million barrels in early February. Over the past two weeks, however, they have dropped by 850,000 barrels.
"One thing that is good for people trading the spreads was the drop in Cushing (inventories) -- that has solidified the nearby (futures contracts) against the deferred (contracts)," said Mike Zarembski, senior commodities analyst for optionsXpress in Chicago.
The flattening of the futures curve has come as OPEC cuts production as part of agreements made last year to help draw down inventories and prop up supplies. In addition, gasoline demand in the United States has begun to pick up as prices at the pump tumble from record highs, encouraging refiners to run more oil through their plants.
Further pressure is coming from the rising cost of keeping crude in inventory. Analysts said storage costs have nearly doubled since the third quarter of 2008.
"Storage capacity is itself a commodity and because of the record levels for this time of year the charge-to-carry cost has gone up quite a bit," said Chris Jarvis, senior analyst for Caprock Risk Management in Hampton Falls, New Hampshire.
"I think the contango market is already started to subside and flatten out," Jarvis added.
Near-month U.S. crude futures have been trading at a steep discount to later months since last November -- a market condition called contango that has enabled companies to earn a profit by storing oil and selling it at a later date for a higher price.
The discount of the front-month contract to the second-month contract, however, has narrowed to around $2 a barrel -- about half the levels seen at the start of February -- and could keep shrinking as OPEC cuts and signs of a recovery in gasoline demand lift near-month prices.
"The belief is that the easy money has already been made in the contango spreads," said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc. "Spreads have narrowed as OPEC cuts are starting to make their way through the market and demand is stabilizing a bit."
Analysts said stockpiles of crude oil held on tankers offshore may be sold first as the curve flattens because of the higher cost of storage. It costs around $1.50 a barrel per month to store crude in tankers, compared to about 75 cents to store crude in tank farms onshore.
"What we see is a reversal pattern moving toward backwardation (when front month futures trade at a premium to later months)," said MacNeil Curry, analyst for Barclays Capital in New York. "The upside we foresee in several weeks time is a (front-month) discount of 25 cents."
STOCKPILES SWELL
There is plenty of oil to sell. Global stocks held on supertankers at sea have topped 80 million barrels, according to top tanker company Frontline.
On land, U.S. crude stockpiles have grown more than 20 percent since last fall due to contango buying combined with slumping demand from recession-hit consumers and businesses, bringing them near an 11-year high of 351 million barrels.
Inventory levels in Cushing, Oklahoma, the delivery point for the New York Mercantile Exchange oil futures contract, have swelled to a record 34.9 million barrels in early February. Over the past two weeks, however, they have dropped by 850,000 barrels.
"One thing that is good for people trading the spreads was the drop in Cushing (inventories) -- that has solidified the nearby (futures contracts) against the deferred (contracts)," said Mike Zarembski, senior commodities analyst for optionsXpress in Chicago.
The flattening of the futures curve has come as OPEC cuts production as part of agreements made last year to help draw down inventories and prop up supplies. In addition, gasoline demand in the United States has begun to pick up as prices at the pump tumble from record highs, encouraging refiners to run more oil through their plants.
Further pressure is coming from the rising cost of keeping crude in inventory. Analysts said storage costs have nearly doubled since the third quarter of 2008.
"Storage capacity is itself a commodity and because of the record levels for this time of year the charge-to-carry cost has gone up quite a bit," said Chris Jarvis, senior analyst for Caprock Risk Management in Hampton Falls, New Hampshire.
"I think the contango market is already started to subside and flatten out," Jarvis added.
