By Dan Murtaugh and Sarita Williams
(Bloomberg) — Oil cavern space at the Louisiana Offshore Oil Port sold for 10 cents a barrel a month at an auction on Tuesday, offering a glimpse into the value of storage as domestic crude supplies swell to a record.
The sale of more than 11 million barrels of room in a cavern at LOOP LLC’s Clovelly hub in Louisiana was part of CME Group Inc.’s plan to offer the first physically delivered futures contract for oil storage. CME, the largest commodity- trading platform, listed a contract for trading this week based on the space at LOOP.
Storage contracts are trading hands for the first time as U.S. crude stockpiles reached a record 466.7 million barrels and production continued to climb to the highest level in over three decades. Banks including Goldman Sachs Group Inc. are projecting another slide in oil prices as tanks in the U.S. near capacity and suppliers work to get rid of barrels.
“There was quite a bit of interest in it,” Terry Coleman, LOOP’s vice president for business development, said by phone Tuesday. “The beauty of it is there’s full transparency for all participants.”
U.S. benchmark West Texas Intermediate oil for May delivery at the Cushing, Oklahoma, storage hub fell 23 cents to $47.37 a barrel in electronic trading on the New York Mercantile Exchange at 12:18 p.m. Singapore time. Futures have fallen 56 percent since settling at $107.26 on June 20.
NEO Markets Inc., which ran the sale of LOOP’s storage on Tuesday, will continue to auction 7,000 contracts a month, each entitling the holder to 1,000 barrels of storage space at a storage cavern in Clovelly.
Chris Grams, a spokesman for Chicago-based CME, said the storage futures contract cleared a U.S. Commodity Futures Trading Commission review and became available on the New York Mercantile Exchange for Monday’s trade date. At expiration, the holder keeps the right to physically store sour crude at the Clovelly hub for the month specified.
NEO auctioned 875 May storage futures contracts, which will be cleared by CME, for 10 cents a barrel. In addition, it auctioned 10,409 physical forward agreements for specific months over the next year at prices between 5 and 8 cents a barrel. Another auction will take place next week, Coleman said.
The storage futures are expected to improve the liquidity of CME’s existing Gulf Coast sour crude futures contract, which is physically deliverable at LOOP, CME said in a March 4 statement. The exchange planned to broaden the specifications of its sour crude contract to include Poseidon, Mars and LOOP Seg 17 grades in the Gulf.
LOOP, the largest crude-import hub in the U.S., has about 69 million barrels of capacity in storage tanks and underground caverns.
Spot Mars Blend oil loaded at Clovelly fell 40 cents to a $2.95-a-barrel premium versus WTI on Tuesday, data compiled by Bloomberg show. Poseidon crude, loaded at Houma, Louisiana, fell 55 cents to $2 a barrel over WTI.
Mars for June delivery sold for 29 cents a barrel more than Mars for May delivery on Tuesday, according to data compiled by Bloomberg.
A more liquid Gulf Coast sour crude contract could compete against benchmarks such as the Argus Sour Crude Index, which is used as the basis for U.S. sales of crude from Saudi Arabia and Iraq. The Argus index and other Gulf sour benchmarks are based on private trades voluntarily reported to the companies, rather than trades executed on a visible platform.
–With assistance from Lynn Doan in San Francisco.
© 2015 Bloomberg News