(Photo: Bloomberg)
An announcement made by the CME Group Inc (NASDAQ:CME) on Wednesday unveiled a new futures contract designed specifically to meet the demand by oil traders for additional storage facilities. While most speculators are not taking delivery on the contracts, the practice gains popularity every time crude oil prices decrease dramatically.
The contract comes at a time when the U.S. in general is running out of space for storing crude oil. Recent analyst reports have suggested that due to increasing production and imports, a daily average of 1 million barrels of crude oil have remained in excess.
With the additional crude being stored, the demand for storage capacity has been rapidly increasing. According to a report by the U.S. Energy Department, supplies are at their highest point in 80 years.
In the aftermath of the financial crisis of 2008, a number of speculators chose to take delivery on the futures contracts they were holding in the hope they would manage to sell the crude oil stock at a higher price at some later stage.
While prices never went back to the highs marked in 2008, traders were able to minimize their losses as WTI crude oil slid from $147 to below $35 per barrel. At the time, oil traders taking delivery paid for vessels carrying crude oil to stockpile the commodity at sea.
The practice has once again become widely used during the recent oil price slump as commodity traders ended up with contracts totaling a substantial paper loss.
The CME Group Inc (NASDAQ:CME) will provide an alternative to stockpiling crude oil at sea, by introducing an exchange-traded storage futures contract. The crude oil storage facilities are located in Louisiana and are owned by LOOP LLC.
CME Group’s Managing Director, Global Head of Energy Products, Martin Fraenkel, said in the announcement, "As global crude oil supply and demand dynamics continue to shift, CME Group remains focused on meeting the Risk Management needs of our energy customers.”
“We believe this innovative new solution will help customers manage their physical crude storage price risk, while enhancing price discovery and access to short-term storage capacity along the U.S. Gulf Coast,” he concluded.
LOOP LLC currently holds the largest privately-owned crude oil terminal in the U.S and will be providing the service after more than 30 years in business. The CME Group Inc (NASDAQ:CME) is launching the the first-ever physically delivered crude oil storage futures contract partnering with NEO Markets, which is a leading online marketplace for U.S. physical oil transactions.
The President of LOOP LLC, Tom Shaw, commented, ”LOOP's reliability record, unparalleled market connectivity, extensive supply of medium sour crude and significant storage capacity provide the market a unique storage opportunity on the Gulf Coast."
The three way partnership between the CME Group Inc (NASDAQ:CME), NEO Markets and LOOP aims to change the marketplace in the existing NYMEX Gulf Coast Sour Crude Oil futures contract, by bringing in more Liquidity .
Each futures contract will represent the right to store 1,000 barrels of crude oil at the hub for a specific calendar month and will launch in the beginning of May via CME Globex.
The Co-CEO and President of NEO Markets, J. Robert Collins, Jr., said in the announcement, "By offering storage rights to a broader market through these new futures contracts, we expect to provide greater transparency, ease of access, liquidity, flexibility and security of supply for companies dependent on Gulf Coast oil deliverability.”
