By July 21, 2016 Read More →

More pain seen for US crude as product glut adds to gloom

US crude

Unusually large US crude and gasoline stocks along with an expected increase in production have made traders more bearish on the price outlook for late 2016. David McNew Getty Images photo.

US crude stocks historically high for this time of year: US Energy Department

By Devika Krishna Kumar

NEW YORK, July 21 (Reuters) – A glut of refined products has worsened the already-grim outlook for US crude oil for the rest of the year and the first half of 2017, traders warned this week, as the spread between near-term and future delivery prices reached its widest in five months.

A stubborn, massive supply overhang punished crude over the winter as US oil futures hit 12-year lows in February. As supply outages and production cuts increased, crude rallied and spreads tightened significantly in May.

But the unusually large amount of gasoline and oil in storage, combined with expectations of a ramp-up in crude production, has made traders more bearish on the price outlook for late 2016 and early 2017.

West Texas Intermediate (WTI) futures for delivery in September traded at a discount of as much as $2.23 to those for delivery in December on Wednesday, the biggest this year.

Turnover in that spread soared, touching a record high of more than 19,000 contracts, or about 19 million barrels of oil.

December spreads, which are the most actively traded, have also blown out in the past month. The discount of the WTI December 2016 contract to December 2017 widened to $4.11 last week. On Wednesday it traded as wide as $3.92 with over 15,000 lots traded.

In May that spread had narrowed to just 50 cents, the tightest since November 2014.

The market is concerned that gasoline supply will not clear up in the second half of 2016, causing refinery run cuts and another wave of excess crude, a North Carolina-based trader said.

These are, however, short-term concerns, leading to more pressure on the front part of the curve, he said.

US crude inventories have fallen for nine straight weeks, but at 519.5 million barrels, stockpiles are at historically high levels for this time of year, the U.S. Energy Department said.

“The market may be adjusting to the reality that crude stocks are not only not going to draw rapidly, but also that as we move into refinery maintenance season, that could exacerbate the problem,” said Andrew Lebow, senior partner at Commodity Research Group in Darien, Connecticut.

As of last week, some 241 million barrels of gasoline were sitting in storage tanks, the most in at least a quarter of a century for this time of the year – the height of the U.S. driving season.

Some refiners have already cut output as gasoline margins sink.

Meanwhile, U.S. oil drillers have added a net 32 oil rigs since early June, the biggest increase during a nine-week period since last summer.

Further out the curve, the discount between futures for delivery in June 2017 to those in December 2017 last week reached its widest since February, at $1.66. It was close to those levels on Wednesday, trading at a discount of as much as $1.37.

To be sure, producer hedging has also played a part in keeping the 2017 contracts and spreads under pressure, traders and brokers said. Last week, Laredo Petroleum said it hedged about 2 million barrels oil for 2017 early in July.

Companies have capitulated to a sustained period of weak prices and are looking to lock in profits now, for fear of another crash. After rising to $51 a barrel in early June, on Wednesday U.S. crude settled at $44.94 a barrel.

One London-based broker said it is “scary” when producers lock in output even with prices at current low levels, adding that it was an indication that the oversupply would continue.

(Reporting by Devika Krishna Kumar in New York; Editing by Jeffrey Hodgson)

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