Oil traders use little-known option to push more crude into Cushing

A clause buried in a major oil pipeline contract may boost already-swelling stockpiles in the U.S. storage hub at Cushing, Oklahoma, deepening the discount for front-month oil prices as traders choose to store hefty volumes of oil for up to six months.

Oil traders contracted to move crude along Enbridge Inc’s 600,000 barrel-per-day Flanagan South pipeline are considering triggering the clause, which says shippers can store oil in Cushing for up to six months without paying a penalty, provided storage space is available, rather than shipping it to the Gulf Coast directly.

The oil can be shipped to the U.S. refining hub at a later date for a small 25-cent per barrel fee, according to tariff filing from October.

Taking advantage of this clause, listed on the second to last page of the 17-page document, would disrupt regular shipments to the hub, according to three traders familiar with the transactions who are unauthorized to speak to the media.

Enbridge spokesman Graham White said the company could not comment because it is commercially sensitive client information.

The option is a relatively new one – Flanagan South just started up in December – and finally looks attractive given the wider forward price curve known as a contango in West Texas Intermediate crude.

That refers to a structure where the front-month price is below the price sold in the future, and allows traders to lock in profits by buying oil now and selling later at a higher price.

“It’s going to be build baby build in Cushing,” said one trading source.

The move is the latest opportunity for traders looking to profit from oil’s second worst ever rout that has slashed prices by nearly 60 percent since the summer while demand is lackluster.

This could accelerate the build in Cushing where inventories recently jumped to a 12-month high, deepening the contango.

Those builds may be further exacerbated in the second week of February when uncommitted shippers will also have the opportunity to send crude from Flanagan, Illinois, the starting point of the pipeline, down to Cushing, Oklahoma, instead of directly to the Coast, according to a filing.

Triggering the clause may also delay volumes of heavy crude flowing from Canada to Gulf Coast refineries. Flanagan South is considered the northern leg in a two-pipeline route delivering Canadian crude to the Gulf Coast.

At Cushing, Flanagan South connects to Enterprise Products Partners LP’s Seaway Twin pipeline, which has recently been running at about half capacity.

Macquarie analysts said last week they expect Cushing inventories to approach 50 million barrels by the second quarter on increased pipeline flows. They added that the build was driven by an increase in flow in Flanagan South deliveries by 90,000 bpd and a decline in Seaway Twin flows by 260,000 bpd.

NEDERLAND VS CUSHING

In a tariff filing from January, spot shippers will be able to send crude from Flanagan into Cushing at a rate of $3.25 a barrel. Previously, Enbridge only offered a Flanagan to Gulf Coast tariff.

Traders say keeping crude in Cushing could be profitable for several reasons: storage is cheaper and more readily available than in Nederland, Texas, and Nederland’s price premium over Cushing has almost disappeared for heavy and light oil.

As the discount for buying front-month West Texas Intermediate oil widens relative to future months, the 25-cent re-entry hurdle is becoming less of a barrier, traders say.

The front to six-month spread on West Texas Intermediate traded at 79 cents on Dec. 1 when Flanagan South started and has since deepened to nearly $5.40 a barrel.

source:reuters