Traders do not appear worried that rising oil stocks in the United States will cause storage space to run out in the next few months, despite the rapid accumulation of inventories at Cushing in Oklahoma.

The term structure of futures contracts has remained broadly stable since the end of January (link.reuters.com/xyg44w).

Stocks “may soon test storage capacity limits”, the International Energy Agency worried in its latest monthly Oil Market Report. “That would inevitably lead to renewed price weakness,” it added.

The view is shared by many bearish hedge fund managers and oil analysts, who have watched the steady climb in U.S. oil inventories for 15 consecutive weeks.

Crude stockpiles at the Cushing storage hub hit a record 54 million barrels on March 13, according to the latest Weekly Petroleum Status Report from the U.S. Energy Information Administration (EIA).

Tank farms at Cushing are now 77 percent full, the EIA said on Monday (“Crude oil storage at Cushing, but not storage capacity utilisation rate, at record level” March 23).

But the stock build at Cushing does not represent the storage situation across the United States as a whole or the state of the global oil market.

A closer look at the structure of futures prices suggests the market as a whole is much less concerned about oil stockpiles hitting “tank tops” in the next few months.

A SMALL TOWN IN OKLAHOMA

Cushing’s oilfield was discovered in 1912 and over the next 50 years it produced more than 430 million barrels of crude. But the tiny township owes its modern importance to its central position on the U.S. pipeline network and the proliferation of tank farms which have sprung up nearby for storing oil.

Cushing is the delivery point for oil delivered in physical settlement of U.S. light crude futures under rules established by the New York Mercantile Exchange, now part of CME Group.

Cushing owes its special status to its NYMEX designation and the large amount of speculative storage space which has been built in the area available for hire to third parties.

Since the end of November 2014, stocks at Cushing have risen 30.5 million barrels (128 percent) compared with 79 million barrels (21 percent) across the country as a whole.

Cushing accounted for just 6 percent of nationwide stocks at the end of November and still accounts for just 12 percent even after the concentrated build up.

Crude stocks along the U.S. Gulf Coast, which accounts for half of unrefined oil storage nationwide, have risen by just 33 million barrels (17 percent) since the end of November.

CASH AND CARRY ARBITRAGE

As oil markets have moved into a steady contango structure, where the prices of longer-dated futures contracts trade above those for near-term delivery, traders have bought up surplus oil and shipped it to Cushing to store.

“Cash and carry”, as the strategy is known, exploits differences between the implied cost of storage, financing and insurance embedded in the term structure of futures contracts and the actual cost traders pay to borrow funds and secure tank space.

In principle, once all the components of a cash and carry strategy are in place it is a riskless source of arbitrage profit. For convenience, however, and to eliminate one potential source of risk, traders prefer to store oil close to the NYMEX delivery point in case they decide to make physical delivery.

Cushing therefore attracts crude more than other locations when the futures market structure is favourable for storage plays. Other locations in the rest of the Midwest and in the major refining centres along the U.S. Gulf Coast have seen much smaller proportionate builds in crude stocks over the last 15 weeks.

Cushing is enormously important from a logistical point of view for anyone trying to make or take physical delivery of U.S. crude against NYMEX futures and has been the source of some famous squeezes and market manipulations in the past.

But it is not really representative of the supply and demand situation for the country as a whole let alone globally. If the tank farms at Cushing reach full capacity, there are plenty of other options for storing oil in other parts of the country.

TERM STRUCTURE IS STEADY

The structure of futures prices suggests traders are not worried about running out of onshore storage space and see little need to explore more expensive options for storing oil offshore on board tankers.

Having moved into a substantial contango since July 2014, the price difference between June and December 2015 futures contracts for both U.S. crude futures CLM5-Z5 and Brent futures LCOM5-Z5 has remained largely unchanged since the end of January even as reported crude stocks have continued to climb.

If the market was concerned about space at Cushing and onshore more generally, the contango would have widened even further as stocks rose to make it profitable to use more expensive offshore storage.

However the term structure of futures prices has remained essentially unchanged for the past two months – implying traders are not particularly concerned about storage issues and do not foresee the need for more expensive options like floating storage.

Markets are not infallible: the current view about storage space and inventories could prove to have been complacent. But right now physical traders do not seem worried about storage space running out.