NEW YORK/MEXICO CITY (Reuters) - Trading firms are offering to sell large volumes of foreign crude into the United States in what could be the first steps to unload their large offshore storage positions as the crude futures curve flattens.
Front-month crude oil futures are trading near their lowest discount to second-month futures since late 2008. The spread between July and August WTI futures fell as low as 40 cents a barrel on Wednesday. As recently as mid-April, the spread was wider than $2 a barrel.
The narrowing spread means that trading firms cannot profit from storing oil offshore as they have in recent months, to reap the benefits of discounts for prompt oil prices.
Monthly crude storage costs between 60 cents and $1 a barrel onshore while offshore storage costs more than $1 a barrel, according to industry estimates.
“There were a lot of people ‘hiding’ cargoes in storage, and now they are offering,” one trader said about the higher volumes on offer.
Among the foreign crude grades offered are cargo-sized loads of light Nigerian crude at attractive prices versus U.S. crude grades, another trader said.
As recently as April, several industry sources estimated that at least 100 million barrels of crude were being stored on supertankers worldwide, largely in the Gulf of Mexico off the U.S. coast.
Crude brokers, and the large trading firms or banks they represent, have remained discrete as they try to avoid signaling that a wave of crude could come ashore and flood the market.
“The sellers have been working very carefully on that, no panic, no noise, no pushing,” a trader said, requesting anonymity.
U.S. refiners are reluctant crude buyers at best. U.S. crude inventories remain near 19-year highs and refinery utilization is hovering almost 10 percentage points below normal due to low fuel demand, according to Energy Information Administration data. <EIA/S>
But the expense of crude storage, coupled with growing demand in Asia for cargoes of West African crude, is driving oil brokers to more openly seek U.S. buyers for stored crude.
Demand for lightering vessels, the smaller tankers used to unload Very Large Crude Carriers (VLCCs) that are too big to dock at most U.S. ports, has yet to increase rapidly.
But as many as six West African crude oil cargoes in floating storage could have come ashore in the U.S. Gulf this week, traders said.
Among the crudes for sale were cargo-sized loads of Nigerian Bonny and Qua Iboe, heard offered for 75 cents above West Texas Intermediate, a broker said. Nigerian Escravos crude was heard offered for 40 cents above WTI.
The prices for the West African grades are attractive and may pressure some U.S. crude grades with similar specifications, such as Light Louisiana Sweet, which on Tuesday exchanged hands for $1.45 above WTI.
Foreign crude grades recently became more competitive against U.S. cash crude since WTI regained a premium to Brent oil, after trailing Brent for months. Most foreign grades are priced against Brent, Europe’s benchmark crude.
Among the players who in recent quarters have stored large volumes of crude offshore the U.S. Gulf Coast are Koch and Vitol. Since the sell offers for crude cargoes are made through third-party brokers, it’s difficult to tell who is offering the most crude, or who is betting the contango curve will steepen once again.
A source at a major refiner said he witnessed a pick up in the trading of delivered crude cargoes, but said it was unlikely U.S. refiners would buy heavily.
“I don’t think refiner utilization is or will be increasing any time soon,” the trader said, citing fears among refiners about the economy, which have kept fuel demand at low levels.
Additional reporting by Bruce Nichols in Houston; Editing by Christian Wiessner