We've talked before about the craziness that is the Local Oil market. We’ve talked about how the two important benchmarks of oil pricing are West Texas Intermediate (NYSE:WTI) and Brent Crude—Brent being the posh European blend and WTI our homegrown brand. We’ve even mentioned how the two trade usually within a dollar or so of each other, at least until this summer, when Brent started trading at nearly $6 ahead of WTI.
So it's against this backdrop that we read the Wall Street Journal article, "Where Has All The Oil Gone?" The story discovers Cushing, Oklahoma. (Remember, Cushing is the place where all the WTI contracts are delivered, and is therefore the nominal heart of the U.S. financial oil market.)
Oil storage is what Cushing is all about. Back when the market was living it up in contango (with future oil more expensive than today's oil), the storage tanks around Cushing were full. After all, if it was a better deal to sell it tomorrow, so might as well hang on to it … in Cushing.
And so, everyone was in the oil storage business. Not only were the oil companies sitting on oil, they were apparently leasing out space to financial players like Morgan Stanley and others who could make more money storing it than trading it.
Because of all the money to be made storing oil while the market was in contango, the oil inventory numbers in Cushing looked good—a fact that OPEC cited when keeping its quotas intact. But then the market changed (global demand continued to rise, supplies lagged) and suddenly backwardation was back. In backwardation, it's now more attractive to sell your oil inventory than store it, so voila, inventories began to drop.
So here we are now, with inventories in Cushing lower than usual … a veritable ghost town in the oil storage business. But now, national inventories appear to be right in line. In other words, all that seems to have happened is that the oil has finally left the Midwest and is more evenly distributed around the country.
Why does it matter? Because for better or worse, more people pay attention to the Cushing numbers than anything else, since it's the delivery point for the WTI futures contract. And the market in Cushing is what determines if we’re in contango, or backwardation, or anything else … it all depends on how much room there is in those tanks in the middle of the American heartland.