More and more investors and traders are betting on a rebound in oil prices, and many effectively are hoarding oil.
But when you hoard oil, you have to store it somewhere. In fact, spare storage capacity is getting so tight that the cost of storage is surging, sending the oil futures market into super contango, which is where the futures contract price is higher than the expected price.
All of this has inspired a lot of creativity from the industry. Storage itself is becoming as big a commodity as the oil.
In the case of producers, Bloomberg reports that some are taking advantage of this situation by relying on nature’s storage space: the ground.
Drillers who have spent millions boring holes through petroleum-rich shale rock are just waiting for prices to go up before turning on the spigot. From North Dakota to Texas, there are more than 3,000 wells that have been drilled but not tapped, based on estimates from Wood Mackenzie Ltd. and RBC Capital Markets LLC. Waiting gives producers such as Apache Corp. and EOG Resources Inc. a better chance of receiving a higher price. It could also delay a recovery by attracting more supply every time prices rise.
And on the traders’ side, there’s a new derivative in town: the oil storage futures contract.
The CME Group has just announced a new futures contract for Gulf Coast crude-oil storage. Here are the details, from the WSJ:
At the beginning of every month, a 30-minute online auction will be held through brokerage NEO Markets Inc. In the auction, LOOP LLC — known to many as the Louisiana Offshore Oil Port — will sell 7,000 contracts. Each contract will give the buyer the right, but not the obligation, to store 1,000 barrels of sour crude oil in LOOP’s Clovelly Hub in Louisiana for a month.
Once the contracts are sold through the auction, they can be bought and sold freely. At the end of the month, anyone holding a contract can use the storage space, which will hold the oil in either an above-ground storage tank or an underground cavern.
The storage can be used for only three types of sour crude. Conveniently, those three types of crude will be tradable using CME’s Gulf Coast sour-crude futures contract, which is being renamed the LOOP Gulf Coast Sour Crude Oil contract.
Whether anyone actually wants to trade these contracts is unclear. But it says something that someone is willing to try.