More oil is put into storage...

More oil is put into storage, waiting for prices to rise
Record contango pushes up oil inventories; Cushing stockpiles at the highest

By Moming Zhou, MarketWatch
Last update: 2:01 p.m. EST Jan. 12, 2009Comments: 25NEW YORK (MarketWatch) - A record amount of crude oil has been put into storage as investors and producers waited for oil prices to rise in the following months, in the hope that they can sell their oil at dearer prices.
Futures trading on the New York Mercantile Exchange indicated that a barrel of oil might fetch a much higher price in a few months. At Friday's closing, crude for July delivery was more than $13 higher than February crude, a gap that's never been seen between the two months' contracts.
Contango, or the situation where the price of a far future delivery commodity is higher than a nearer future contract, isn't surprising, with price difference typically representing the cost of storage and the time value of money.
But when the price spread is greater than the storage cost, "there is an opportunity to arbitrage at a profit without risk," said James Williams, an economist at energy research firm WTRG Economics. "Typically contango leads the storage buildup," he added.
Crude prices, currently nearly $110 lower than the record high above $147 hit in July, are expected to rise in the second half of the year as international economic stimulus efforts breathe life into the global economy and major producers cut output, analysts said. Instead of selling oil at a depressed price amid sluggish demand, more producers and investors are hoarding oil for future sales.
"When the market flips into contango, meaning the current month is less expensive than the month going forward, people start putting crude into storage," said Jeff Mower, editor-in-chief at Platts Oilgram Price Report. Contango "creates a financial incentive to store more barrels."
Record crude has been stocked at Cushing, Okla., the delivery point for futures traded on the Nymex. Cushing inventories jumped to 32.2 million barrels in the week ended Jan. 2, more than 9 million, or 40%, higher than a month ago, according to the U.S. Energy Information Administration.
That's the highest level since at least April, 2004, when the EIA started collecting Cushing data.
Super contango
The ongoing economic turmoil has pummeled oil prices and created contango that hasn't ever been seen. On Dec. 19, the expiring January contract ended at $33.87 a barrel, $8.49 lower than the February contract. That's the widest contango between two successive months' contracts, according to energy information provider Platts.
With price gas that big, oil investors can pocket lucrative profits by simply buying the January contract, taking the physical oil delivery and storing it, and at the same time selling the February contract.
Meanwhile, the oil storage business thrived as energy players sock away plentiful crude to wait out the current price trough.
Bruce Macphail, director of contract terminals at Enbridge, said the company's 15.5 million barrel storage capacity at Cushing is nearly full. He said the company holds contracts with a variety of energy companies ranging in length from six months to several years. Read more on oil storage.
As the current contango is expected to widen, Cushing inventories could rise further, analysts said. Storage capacity at Cushing stands at around 42 million barrels, according to Platts.
Rising inventories
Beyond Cushing, oil stockpiles are also on the rise across the nation.
Total U.S. commercial inventories, or oil held by producers, refineries and other users, jumped 6.7 million barrels in the week ended Jan. 2 from a week ago to hit 325.4 million, the highest level since May, 2008.
Refineries, meanwhile, are scaling back their production to wait for demand and prices to rise. U.S. refineries operated at 82.5% of their totally capacity of 17.6 million barrels a day at the end of last year, the lowest utilization rate since October, 2008.
Futures markets indicated gasoline prices will rise in the following months. On the Nymex, the September reformulated crude contract closed at $1.3817 Friday, or 24% higher than the February contract.
At the pump, regular gasoline averaged at $1.79 a gallon Monday, up 13 cents from a month ago, according to AAA's Daily Fuel Gauge Report.
Moming Zhou is a MarketWatch reporter based in New York.