Crude back on the defensive

January 28, 2015 09:58 AM

Crude oil is back on the defensive this morning after a much larger than expected build reported in last night’s API inventory report (see below for details). Crude oil builds should not be a surprise as both WTI and Brent remain in a wide enough contango for storage trades to continue to be added going forward. Following is the latest estimate of the economics of storing Brent in floating storage and WTI in land based storage.

As shown the return for both crudes is not only positive but has improved since I last published this table a few days ago. On the WTI side the contango provides an improving return through the 12 month period while the economics of storing Brent is optimum through six months. As storing oil continues to be economical additional barrels will find their way into storage trades resulting in the contango likely widening even further.

Further pressuring oil prices today is yet another bearish report issued by Goldman Sachs research. They are projecting WTI to trade close to the $40/bbl through the first half of 2015, which should then slow supply growth, keep further capital investment in US shale sidelined and balance the global market by 2016. Eventually they are expecting a U shaped recovery to the marginal cost of production of $65/bbl for WTI and $70/bbl for Brent.

 

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