(Updates with WTI settlement prices in fifth paragraph and Flanagan South pipeline in 10th.)
July 23 (Bloomberg) -- Crude oil supplies at the main U.S. trading hub have dropped to the lowest level since November 2008, pushing futures for immediate delivery to the highest premium in six years.
Front-month West Texas Intermediate crude futures have averaged 84 cents a barrel more than the second-month contract in July, the biggest monthly spread since March 2008, according to exchange data compiled by Bloomberg. Stockpiles at Cushing, Oklahoma, dropped to 18.8 million barrels last week, the Energy Information Administration reported today.
Inventories at Cushing, the delivery point for New York- traded futures, have slid 55 percent since January as refiners boosted fuel production and as a new pipeline moved oil to the Gulf Coast, where prices are higher. That has boosted the backwardation, or premium traders are willing to pay for near- term delivery, up from 8 cents a barrel.
“Cushing supply is certainly pushing the front-month higher and reinforcing the backwardation,” said James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas. “Lower inventories at Cushing push the front- month prices up, and when the front-month is up, there is less incentive to store oil. This becomes self-reinforcing.”
September WTI futures gained 73 cents to $103.12 a barrel on the New York Mercantile Exchange. That was $1.47 more than the October contract, which rose 42 cents to $101.65. The gap between front-month and second-month futures reached $2.03 yesterday when the August contract expired, the widest gap since September 2008.
Cushing inventories fell 1.45 million barrels in the week ended July 18, the biggest decline since May 23, according to the EIA, the Energy Department’s statistical arm. Supplies nationwide also decreased, down 3.97 million to 371.1 million.
Refineries operated at 93.8 percent of their capacity, unchanged from the previous week when it was the highest since 2005. Companies ramp up their fuel production to meet peak demand in the summer driving season, typically starting on Memorial Day, which was May 26 this year, and runs through Labor Day on Sept. 1.
Supplies at Cushing have declined since January as the southern leg of TransCanada Corp.’s Keystone XL pipeline began moving oil to Gulf refineries. WTI was $4.40 below Light Louisiana Sweet crude on the Gulf Coast today after reaching $6.20 on July 21, the biggest discount since February, according to data compiled by Bloomberg.
The decline in Cushing inventories may slow when Enbridge Inc. starts pumping crude through its 600,000-barrel-a-day Flanagan South pipeline, which will bring oil to the Oklahoma hub from the Chicago area.
The line is expected to be filled with crude and ready for service late in the third quarter, according to Larry Springer, a Houston-based spokesman for Enbridge.