U.S. oil inventories will shrink as contango disappears: Kemp

The vanishing contango in U.S. crude oil futures points to a sharp draw down in crude stocks over the next few months as the incentive to store excess oil disappears.

The price for storing U.S. crude for six months has shrunk from around $8.75 per barrel in mid-March to $1.25 on Tuesday (link.reuters.com/kyj84w).

The price of storage barely covers the cost of financing the inventory and renting tank space so it will sharply diminish the incentive for buying and storing excess oil, known as the “cash and carry” trade.

The sharp narrowing of the contango is remarkable because reported crude stocks in commercial storage remain at the highest level for 80 years (link.reuters.com/nyj84w).

Crude stocks in the United States have fallen in each of the last four weeks by a total of 11.5 million barrels, according to weekly data from the Energy Information Administration.

But crude stocks are still 94 million barrels (25 percent) higher than at the end of 2014 and 115 million barrels (32 percent) higher than the 10-year seasonal average.

Domestic oil production is expected to stabilise or even fall over the third quarter given the 60 percent reduction in the number of rigs drilling for oil.

But so far any slowdown lies in the future. Current statistics show crude production running at well over 9 million barrels per day, the highest since the 1972/73.

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