Devika Krishna Kumar and Sheela Tobben 7/8/2022
(Bloomberg) — The heart of the U.S. physical oil markets is screaming for supplies even as headline prices swing due to worries about a global recession.
The U.S. crude prompt timespread, which closely reflects the supply and demand balances at the country’s biggest storage hub in Cushing, Oklahoma, has surged to the highest level since March at nearly $4 a barrel. Stockpiles at the delivery point for benchmark U.S. crude futures are hovering at levels that are considered a minimum requirement to maintain operations.
In the Permian Basin’s hub in Midland, Texas, it’s a similar story. Barrels available in July are trading at around $3.50 a barrel above those in August, dealers said. Last week, the spread was narrower by $1 a barrel, they added. Inventories at Midland have drawn over 400,000 barrels since last month, said Geoffrey Craig, global energy analyst at Ursa Space, which uses satellite data to track storage levels. Compared with last year, stockpiles in this area are about 600,000 barrels lower.
The shortages are somewhat at odds with the larger narrative in oil markets this week. Headline prices have whipsawed as fears of a global recession have gripped the market, prompting worries about whether demand can withstand a weak economy.
“A lot of old school analysts, including me, are pointing at the spreads as a good reason not to believe in a big liquidation fire sale,” said Robert Yawger, director of the futures division at Mizuho Securities USA.
“The super backwardation implies shortage,” he said. Backwardation is a market pattern where the supplies for immediate delivery are trading at a premium to those in the future.
Beyond the spreads, there are other bullish signs. Demand for US crude in overseas markets remains robust. Despite weekly fluctuations, on a four-week basis, outflows are keeping above the 3 million barrel a day mark, a sweet spot among traders in the industry when determining the health of the market. In addition, offshore Louisiana crudes this week are trading at the strongest levels against Nymex oil futures in roughly two months.