ANALYSIS: Cushing stocks fall, but NYMEX crude spread rangebound

     Mounting US crude stocks and lower inventories at NYMEX's delivery point
in Cushing, Oklahoma, kept the front of the NYMEX futures curve in a well-worn
and tight range last week.
     Over the past month, the front-month crude spread on NYMEX has been
trading in a 27-cents range, remaining in contango, somewhat similar to the
market action that persisted during June, July and August. The front spread
edged closer to backwardation during both time periods, but ample supply on
the Gulf Coast and in Cushing prevented such an occurrence.
     The December/January crude spread settled Thursday at minus 67 cents/b
with the market too timid to challenge backwardation given plush levels of
crude inventories, but too smart to send the spread deeper into contango as
stocks at the delivery point dwindle.
     US crude stocks were 368.156 million barrels the week ending October 29,
according to the most recent data from the Energy Information Administration.
Crude stocks were 44.566 million barrels above the five-year average, 32.242
million barrels above year-ago levels and just 23.751 million barrels below
the all-time high posted in July 1991, according to EIA.
     Stocks at Cushing were 33.545 million barrels, the lowest level since the
week ending April 9, but 10.931 million barrels above the five-year average,
8.026 million barrels above year-ago levels and only 4.334 million barrels
below the all-time high seen May 28.
     Crude inventories currently in the Midwest and the Gulf Coast are near
all-time highs as well. Crude stocks in the Gulf Coast at 191.566 million
barrels were 7.123 million barrels off the all-time high, while inventories in
the Midwest at 90.702 million barrels were 7.003 million barrels below the
record. But crude inventories along the Gulf are more critical to Cushing than
those in the Midwest. The primary flow of crude into Cushing comes from the
Gulf. The 190,000 b/d Spearhead line delivers Canadian crude into Cushing from
Chicago, and was expected to run at 165,615 b/d in November, according to line
owner Enbridge.
     Canadian flows will rise once TransCanada brings its Keystone Cushing
Extension line up in the first quarter of 2011.
     The ability to bring Canadian crude into Cushing, along with what
has been an almost exponential expansion in storage capacity at the delivery
point, has altered the dynamics in the front of the crude curve.
    
     ALLEVIATES BOTTLENECKS   
     From 2004 to the present, storage capacity at Cushing has increased from
about 25 million barrels to 51 million barrels. The additional storage
capabilities at Cushing have gone a long way to alleviating the occasional
bottlenecks that occur in that region. That capacity is set to increase yet
again with Plains All-American planning on adding another 4.3 million barrels
of tank space by end 2011. April 2004 was when the Energy Information
Administration started to report crude inventories at Cushing.  
     While ranges in the front spread should, theoretically, reflect
supply/demand fundamentals at the delivery point, they can be representative
of conditions in the flat-price market. While the outright crude market has
been rangebound for most of the year, last week's break to the upside was not
accompanied by any noticeable change in the front spread.
     In both 2008 and 2009 very volatile market conditions were accompanied by
wild swings in the crude front spread. The front spread traded in a
$20.09/barrel and $10.14/b range in 2008 and 2009, respectively, two years
notable for volatility and wide ranges.
     In 2007, when Valero's refinery in McKee, Texas, went offline, causing a
dislocation along the Cushing hub, the front spread traded in a $4.76/b range
for the whole year. This year's trading range in the front spread has been
plus 24 cents to minus $4.59/b.
     That the front spread is trading around minus 67 cents implies crude
stocks at Cushing may fall further once fall turnarounds are completed and
inputs increase. Imports along the Gulf Coast are not apt to climb since
bringing in the barrels is not an economically appealing trade and so the
market is pricing in a steep stock decline along the Gulf as well.
     With all that storage capacity and eventually ability to bring more crude
down from Canada into Cushing, the front spread is less likely to undergo wide
swings, even with the transparency that that data delivers on a weekly basis.
--Linda Rafield, linda_rafield@platts.com

NYMEX FRONT-MONTH CRUDE SETTLES AT TWO-YEAR HIGH OF $87.06/BARREL

     NYMEX December crude, the front month, settled Monday at a two-year high
of $87.06/barrel for a gain of 21 cents on the session despite a stronger tone
to the US dollar and a downturn in equity indexes.
     NYMEX December heating oil settled at a two-year high as well, of
$2.3977/gal, up 1.29 cents.
     While the the US Dollar Index edged away from its intra-session high of
77.164 throughout the trading session, the greenback still held its ground
against all major currencies Monday, following a disappointing report out of
the euro zone.
     "[T]he euro decreased on concerns that Ireland will struggle to handle is
budget deficit. European equities are mostly unchanged, as the focus has
turned to Eurozone debt," Addison Armstrong, head of energy research at TFS,
said in a report. "German industrial production unexpectedly fell in
September, which also disappointed investors."
     The economic calendar for this week is exceedingly light, leaving markets
at the mercy of short-term momentum traders.
     December RBOB settled 15 points lower at $2.1785/gal.