Oil Storage At Record Levels As Speculators Await Higher Prices

When news reports mention the price of oil, they are usually referring to the price of a barrel of the benchmark West Texas Intermediate crude, and that price often depends on how much of it is in large storage tanks near the small town of Cushing, Oklahoma. Paying storage costs may prove profitable if oil prices go back up in coming months as some experts predict they will.

Cushing is a town of just over 8,000 people, halfway between Oklahoma City and Tulsa, an important U.S. oil and gas production zone. Cushing is the location of between five and 10 percent of total U.S. domestic petroleum storage and the delivery point for the New York Mercantile Exchange crude oil contract.


Contango is the term oil traders use to describe the profitable price spread that can develop between the spot price of oil and the higher price they can obtain for future delivery. If the future price is high enough, the person selling the oil can pay all the storage costs and still make a good profit.

Oil market analyst Phil Flynn of the Alaron Trading Corporation explains how it works. “You may only pay $40 a barrel, but you could sell it today, lock in a future price much, much higher, just a few months down the road and take advantage of that. You could lock in, per barrel, a $3 or a $5 or, if you could hold the oil long enough, maybe even a $10 profit.”

But Flynn says speculators responding to the recent contango have dramatically increased the amount of stored oil and caused the spread to diminish. He says the monthly supply report issued by the U.S. Energy Information Agency Thursday shows an abundance of idle oil.

“We got hit with a flood of crude. Crude oil built like [approximately] over 6.5 million barrels in just one week. We went from a year ago worrying about peak oil and the world running out of oil to having an oil glut of basically historic proportions,” he said.

Voice of America