Oil prices may experience volatility due to a shortage of oil at the Cushing, Oklahoma, storage site, analysts said.
Oil: Daily Chart
USOIL has pulled back from recent highs at the $94 level and may look for support here, or lower at $86.25 and $84.65.
In the past month, the storage tanks in Cushing, Oklahoma, have been running critically low. Government statistics released last week said Cushing currently houses less than 22 million barrels of oil, which is the lowest since 2014.
Robert Yawger, director of energy futures at Mizuho Securities, said, “We are at really beaten-down levels of storage. It’s been a slow-motion train wreck for weeks, and today it got supersized.”
The primary driver of the oil shortage has been that refiners are operating at nearly full capacity to process crude into gasoline and diesel. A pipeline outage in Cushing has also diverted the flow of oil elsewhere, worsening the situation.
Cushing has a total capacity of around 100 million barrels of oil, and in June, it held about 40 million barrels. In April 2020, during the initial stages of the pandemic, a massive surplus of oil led to storage tanks reaching capacity, which led to oil prices turning negative as traders struggled to find places to store their excess crude.
This has upset the futures market with a surge in prices for November futures contracts, leading to backwardation, where near-term prices surpass future prices, which means traders sell oil.
Yawger does not see the same problems in this month’s expiration of futures as were seen in 2020, but he does predict a turbulent trading environment ahead.
“It’s going to be an interesting expiration. We don’t have any precedent. It’s not certain what’s going to happen,” he added.
The next futures expiry will be October 22, and traders may find opportunities ahead of that date.