Easy Money Possible at Cushing!

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In the days of high gas prices in the US, 2003-08, many companies made easy money by taking advantage of price swings between the summer and winter months. They would buy low priced “physical” gas in the summer months and immediately contract to sell the gas in winter months by selling futures contracts on the NYMEX exchange for delivery in January at a much higher price.  At the same time they would negotiate fees to transport the gas by pipeline to an underground gascontango, crude oil, Cushing, IHRDC, NYMEX, oil and gas, oil trading, United States, US, oil price storage field near the market, like the Honeoye Field in northern New York State that I developed many years ago. Because the transportation and storage fees were modest the trader locked in a significant “contract” margin which he used as credit to borrow funds to pay all costs. He made “easy money” without equity investment on his part.

This is now happening in the US oil market. The NYMEX contract for crude oil is settled at Cushing, Oklahoma where there are many large crude oil storage tanks. The crude oil prices on the NYMEX contango, crude oil, Cushing, IHRDC, NYMEX, oil and gas, oil trading, United States, US, oil pricehave been in “contango” which means that the prices in future months are higher than the current prices in the physical market. The difference is about $10/bbl. So the easy money process in the crude market requires that a trader buy crude today at Cushing, sell a futures contract to deliver it at Cushing in a future month that locks in an acceptable market and then purchase storage capacity from a local tank farm owner.

Unfortunately, the total Cushing working storage capacity of 71 million barrels is all sold out! The recent EIA estimate of inventory of crude (see below) is about 49 million barrels and, with the overproduction or marketers taking advantage of the contango market, it is filling at the rate of 500,000 bbls/week. At this rate it will reach full capacity later this year. Then the producers will face a real quandary – those with long term contracts will be fine but the others will have to cut back on production rates or sell at whatever price they can get to those who have an immediate market.  The picture is not pretty. OPEC’s strategic plan must have envisioned this outcome.

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I should add that there is much more storage capacity, a total working volume of 520 million barrels, within the US and new capacity is being built to meet the growing needs.

If you are thinking of becoming a trader you should know that the NYMEX contract is for 1000 bbls and the exchange will soon be trading storage capacity at Cushing so you will be able to acquire both crude and storage capacity on the same exchange in the future.

See http://www.genscape.com/blog/genscape-reported-significant-build-crude-oil-inventories-cushing-oklahoma-nymex-cl-contract

 

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David Donohue

Dr. David A. T. Donohue is the Founder and President of both IHRDC and Arlington Storage Corporation. Dr. Donohue is a technical specialist, businessman, attorney, and lecturer who is highly regarded for the teaching of management programs devoted to the business of oil and gas. He has successfully designed and taught these “business game” programs to more than 10,000 members of the international oil and gas industry on both in-house and public bases. He was the developer of an innovative video-based learning system for the upstream petroleum industry, which has now been converted to IPIMS, a widely licensed e-Learning system. Dr. Donohue is also the developer and owner of independent underground gas storage facilities in New York State. In his early career he held various positions in engineering and research for Exxon and, for four years, served on the faculty of Pennsylvania State University. Dr. Donohue holds a Ph.D. in Petroleum and Natural Gas Engineering from Pennsylvania State University and a J.D. from Boston College Law School. He is active in public affairs in his hometown, a Distinguished Member of the SPE, and Alumni Fellow of Pennsylvania State University.

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One comment on “Easy Money Possible at Cushing!
  1. Jose L Petit says:

    Great Article Dave….we may see a Bbls at 30$. eventually with productions cuts after storage its full the demand and offer will match to provide a fair balance.

    Tough days for Canadian E&P, Brazil Offshore and even small O&G companies in LA like Pacific Rubiales…..

    Its always a pleasure read and learn from you!.

    Jose

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