NEW YORK (Reuters) - The U.S. oil storage trade is back - and may be bigger than ever.
Six years ago, the financial crisis led to a sudden surplus of oil and a collapse in prices, spurring a classic low-risk trade that's set to make a comeback: buying crude to store in onshore tanks or floating tankers, since oil costs $8 a barrel less now than what futures buyers will pay in a year.
OPEC's decision not to cut output in the face of slower demand and growing U.S. shale has traders scrambling to cash in on the return of a market structure known as 'contango,' by securing storage that could yield an almost guaranteed return of 8 percent or more.
This year, they'll have more scope than ever before to take advantage of the contango play: the capacity of U.S. commercial oil storage tanks has expanded by a third since 2010, while months of strong demand for domestic crude from North American refiners has prevented inventories from swelling too far.
As a result, those onshore tanks are barely a third full, with less than 150 million barrels of the nation's total 439 million barrels of shell storage capacity occupied as recently as October, according to a Reuters analysis of U.S. data. That's by far the highest vacancy rate since the Energy Information Administration began a bi-annual survey of tank farm capacity -- which exclude refinery stocks and oil in pipelines - in 2010.
Since September, U.S. commercial stocks have risen by about 22 million barrels. Assuming all of that fed into tank farms, rather than refineries or pipelines, whose inventory levels generally don't fluctuate much, more than half of the nation's tanks still stand empty, the data show.
The historically large volume of empty tank space may also herald a pause, if not an end, to an unrelenting rout in global markets, as traders embark on a sustained campaign to buy physical crude to stockpile, analysts said -- at least until stocks rise so high that space once again becomes scarce.
"We're at an inflection point" in the oil market, said Philip K. Verleger, an energy economist who has closely tracked oil storage economics for three decades. "Prices can stay at these levels as storage fills. But if demand doesn't pick up or supply go down, then prices will fall again."
The figures may surprise traders who have been thus far focused on the atypical build in stockpiles this winter, with inventories reaching record seasonal highs at a time when they normally decline due to heating demand and year-end tax issues.
For traders in the opaque physical market for U.S. crude, the race for access to storage is already on.
"It's a great bet," said one physical trader with a merchant who was trying to secure storage space in Cushing.
Among the biggest beneficiaries are likely to be big trading houses like Vitol and Mercuria, as well as some midstream firms like Plains All American, who can buy extra crude to fill up storage tanks that they already own. Others will be trying to lease more, likely driving up rates to the benefit of big owners such as Canada's Enbridge Inc, Magellan Midstream and NuStar Energy.
Almost 40 percent of total tank farm capacity was leased to third parties as of last September, up from a low of just 28 percent in 2012, the data show.
The rush emerges after the collapse in global oil prices since June takes a heavier toll on the prompt prices than those in the future, creating a large enough contango in the market to pay for the cost of storage and finance.
The U.S. futures market first flipped into contango in November. By Friday, the February 2016 oil contract was trading at a premium of more than $8 a barrel to the first-month Feb 2015, the widest spread since early 2011 but not yet as alluring as the $25 gap at the height of the financial crisis.
At that time, the annualized financial return from storing a barrel of U.S. physical crude reached 40 to 50 percent, according to estimates by Verleger. Now the return is around 8.5 percent.
Returns are already somewhat higher for North Sea Brent, fuelling demand to charter oil supertankers to use as floating storage due to the relatively limited availability of onshore commercial storage in Europe.
The extra space is also the result of a multibillion dollar build-out of the nation's oil infrastructure over the past five years, as a near doubling in domestic production and a reversal in the flow of crude create new storage demand in new places.
Since September 2010, shell storage capacity at tank farms has expanded by 32 percent or more than 100 million barrels, the EIA data show. Capacity in Canada has also risen.
The scramble for storage will be especially fierce at Cushing, the world's largest commercial tank hub and a prime location for storage plays as the delivery point for U.S. oil futures, where only about 40 percent of 80 million barrels is now occupied, well below normal levels. By early 2009, after a similar rout, Cushing was already about three-quarters full.
The situation is similar well beyond Cushing, according to Genscape, an industry intelligence group that monitors oil facilities including tank farms in Canada, near Houston and in and around the Permian Basin oil patch.
Some 86 million barrels of crude is now held in stocks at those 10 locations, only about half the total capacity at those sites and a decline from peaks in recent months. In the Permian, utilization is 34 percent, the lowest since Genscape began monitoring it in 2010.
The lower utilization rates on the Gulf Coast are "a fixture of the storage economics in Cushing – everyone is storing barrels at Cushing because they've got space to put it and the storage rates are cheaper," said Hillary Stevenson from Genscape.
Reporting by Jonathan Leff; additional reporting by Catherine Ngai, editing by John Pickering