The cash price of benchmark U.S. crude at Cushing, Oklahoma, collapsed on Friday to the deepest discount in nearly five and a half years as traders feared a year-long supply glut may get worse before it gets better.
The December/January West Texas Intermediate (WTI) cash roll traded at -$2.50 on Friday shortly after the front-month WTI December futures contract expired, its weakest since 2010 and well below levels seen in April, when the market feared tanks at Cushing could reach capacity.
“This widening of the spread well beyond the simple cost of storing, insuring and financing inventory – which comes to something more like $0.50 per barrel per month – is sometimes referred to as a “super contango,” said Tim Evans, an Energy Futures Specialist at Citi.
The so-called “cash roll” trades in the three days following the expiry of the prompt futures contract and allows traders to roll their long positions forward. A negative roll occurs in a contango market structure, where later-month barrels are priced at a premium to the prompt contract.
The steeper discount for prompt barrels follows a volatile day of trade in the futures markets. The discount for prompt WTI futures relative to the second-month contract traded at a low of $2.90 on Friday, its steepest discount since 2011 and down $1.63 a barrel from the day’s high.
Futures markets are often more volatile on the day the prompt contract expires, as liquidity and open interest dry up. However, Friday’s pricing moves paint a grim picture for the near-term storage outlook at Cushing.
“There’s at least some risk that stocks continue to back up into Cushing in the weeks ahead, as Gulf Coast refiners typically look to minimize their year-end stock holdings because the Gulf Coast states charge refiners an ad valorem tax on those inventories,” Evans added.
Spreads widened farther along the curve Friday, with January trading at a $1.35 discount to February, a sign that the physical market will likely remain oversupplied.
Energy monitoring service Genscape on Thursday said inventories at Cushing were up by 2.14 million barrels in one week’s time as of Tuesday. Stocks at the storage and trading hub were at 56.85 million barrels at the end of last week, according to the Energy Information Administration.