Oil Traders Scouting Further Afield for NY Diesel Storage

Oil traders are scouring the East Coast for places to store surplus diesel supplies, including on tankers just outside New York harbor, as prompt prices trade at their deepest discounts since the financial crisis.

 

Kinder Morgan, which operates roughly 165 storage terminals from Los Angeles to New York, has received interest from traders looking to lease storage space beyond New York harbor, according to a source familiar with the company's operations.

 

Such "non-conventional" storage is not typically the first choice for traders trying to make money off of the so-called "contango" in the market by buying cheap distillate fuel and locking in higher priced futures for several months hence.

 

Because these tanks are not authorized for delivery against the New York Mercantile Exchange (NYMEX) diesel futures contract, traders hedging their contango trades on NYMEX must haul the fuel back to the harbor in order to make physical delivery, adding both costs and risks to the transaction.

 

"NYMEX qualified storage is extremely difficult to find right now," said Ernie Barsamian, a tank broker and veteran of the oil business.

 

The rush to store distillates such as heating oil at a time when the product is generally drawn out of tanks comes as central Atlantic inventories climbed to a five-year high this month, pushing the market into a contango structure, where later period barrels are priced higher than the prompt contract.

 

"Last year it [the price structure] was backwardated, but this year there is a contango and that's attracting people to store," said Nelson Happy, executive vice president for United Riverhead Terminal, which operates 5.2 million barrels of crude and non-NYMEX qualified petroleum storage in Long Island, New York.

 

The winter contango in the benchmark New York Harbor diesel fuel market is the deepest since 2009, when the oil market was still emerging from the financial crisis.

 

The Dec-March spread was trading at around 5.72 cents a gallon on Friday, down nearly two cents from the start of October. Every year since 2010 the spread has traded at or near a premium.

 

The scramble for space has even pushed traders to explore floating storage, which is usually more expensive and requires a deeper contango than where the market is currently trading, traders say.

 

The Chinese-flagged Hua Lin Wan is currently being used as floating diesel storage, multiple sources said. The ship came into the harbor empty last week before filling up and idling in the New York anchorage, according to Reuters shipping data.