BofA: Critical Levels At Cushing May Lead To Historic Short Squeeze In Oil

• Storage levels at America's largest oil storage hub have fallen to extremely low levels.
• Crude oil inventories at Cushing have shed some 13 million barrels since the start of the year, to stand at 24 million barrels as of last week.
• The risk of a short squeeze is the highest around contract expiry dates near the end of the month.

Crude oil inventories at the Cushing hub in Oklahoma have fallen to the lowest seasonal level since the start of the shale revolution in the U.S., threatening sudden heightened price volatility this week.

This is the essence of a note written by Bank of America analysts as quoted by ZeroHedge as prices are once again on the rise after the European Union signaled it was mulling over sanctions targeting Russia’s energy industry.

According to the note, crude oil inventories at Cushing have shed some 13 million barrels since the start of the year, to stand at 24 million barrels as of last week, which was the lowest since large-scale shale oil production began in the country.

This level, the bank’s analysts went on to say, was likely close to minimum operational levels, which is not good news for prices. And that’s not all, either, according to the note.

Based on current oil price trends, it is possible that a large part of the Cushing inventories is being used for blending at refineries, and another part is being used as a backstop for pipeline oil flows. What this means is that these barrels cannot be used for physical delivery under West Texas Intermediate contracts—and this means supply may be even tighter than previously believed.

CNBC quoted Bank of America’s Francisco Blanch, head of commodities and derivatives, as saying that limited production, higher refinery runs, and higher exports of crude were shrinking inventories at Cushing. This, Blanch said, could cause even more volatility in oil futures because of the condition for physical delivery once the contract expires. The April WTI contract expires today.

“Given the market is desperately short barrels in the near term, we see increased risk of a short squeeze as WTI moves towards expiry each month,” Blanch said in the note, as quoted by CNBC.

At the time of writing, Brent crude was climbing towards $120 again, and West Texas Intermediate was trading close to $115 per barrel.

By Charles Kennedy for Oilprice.com

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