Cushing, Oklahoma is a major trading hub for crude oil
and boasts the largest oil storage facility in the world. It is a famous
price settlement point for West Texas Intermediate Crude grade on the
New York Mercantile Exchange, which is part of the CME Group. The city
was established after the Land Rush of 1889. An oil boom began in 1912
that led to the city's development as a refining center. There has
been a lot of controversy regarding the facility's capacity. Many in
the press are reporting that this facility is nearing capacity, which we
believe to be true. Let's examine why this phenomenon is happening:
Below
is a spread chart between June 16 Crude and June 15 Crude. When spread
prices are declining there is no economic incentive to store crude.
However, when this spread is increasing, especially now at 8.56, there
is a powerful incentive to store crude at today's prices and selling
futures against the stored crude, thus locking in a virtually guaranteed
profit. This spread was at even money, or negative for three and a
half years. There was no incentive to store crude. Now the exact
opposite is true. Keep an eye on the 5.50 support level. If this
spread starts to collapse so will the amount of storage at Cushing,
Oklahoma.
Weekly Crude Oil Futures - Continuation
Chart provided by QST
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