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Friday, January 23, 2009

Oil Ready to Crash?

The following adds a little more color to last week's post Oil Tankers are a Banks Best Friend. For those that missed it, factors have appeared in the oil market that make it attractive for investors to buy oil in the spot market, store it, and sell through the (higher priced) oil futures market. Now that storage is reaching capacity, there is a significant possibility the spot price of crude will "tank" as a source of demand (storage) is no longer available. This is especially true for WTI crude, which is delivered in Cushing, OK and HAS reached its limits according to Marketwatch:

Inventory levels at Cushing, Okla. -- the delivery point for Nymex oil futures -- rose by 0.2 million barrels to a record 33.2 million barrels, the EIA reported. Platts estimates that maximum storage capacity at Cushing is about 42.4 million barrels, but only 80% of that is considered operable.
This suggests that maximum operating capacity is about 34 million barrels, meaning there is little room to add to storage tanks out in Cushing, according to Linda Rafield, senior oil analyst at Platts.

Assuming that 34 million barrels is an accurate level of the maximum capacity in Cushing (i.e. 98% of the capacity is filled) this explain why the price of WTI crude has fallen so much relative to Brent and makes the case for a potential crash in the WTI crude spot market.

Source: EIA