A key U.S. crude hub has dried up nearly dry as a massive new Canadian pipeline diverts crude elsewhere, muddying the market signals that traders have long relied on.

Crude oil inventories at the Cushing, Oklahoma, warehouse complex have been falling for the past four months and are near their lowest levels for this time of year in a decade.

Market participants say such draws typically occur when fuel demand rises during driving season, and the inventory draw has been more severe this year because the expanded Trans Mountain pipeline has shifted Canadian crude supplies to the country's Pacific coast and away from the U.S. Gulf Coast.

The expanded Trans Mountain pipeline has been delivering about 400,000 barrels of crude per day since it began operations in May, and Cushing inventories have lost nearly 13 million barrels of crude during that time.

The flow of Canadian crude to the U.S. Gulf Coast has fallen to the point where the pipeline system owned by rival Enbridge Inc has mostly avoided the congestion that typically accompanies the U.S. summer driving season.

Traders said European demand for U.S. crude is also drawing barrels from Cushing storage, especially as buyers seek similar grades following a supply disruption in Libya.

“Because of the risk in Libya, I tend to think that in the short term storage will remain at the bottom of the tanks and the market will make exporting WTI crude too expensive,” said Scott Shelton, energy expert at TP ICAP Group Plc.

The continued drawdown in Cushing inventories helped lift the spread between the two closest WTI crude futures contracts. After climbing to its highest level in nearly a month, the spread hovered around $1 a barrel.

Changes in crude oil price spreads are a closely watched indicator of the supply and demand balance, and despite concerns about a long-term oversupply, current changes in spreads suggest there is a shortage of crude available for immediate delivery.

Inventories at Cushing are currently around 22.7 million barrels, less than a third of the hub’s 78 million barrel storage capacity. The rapid decline in inventories has raised concerns that the hub’s ability to operate normally could be threatened.

Big draw at Cushing puts stocks near 'bottom of tank'

Oil prices rebound on Fed rate cuts, CTA buying and record short covering

Oil prices have risen more than $6 from their lowest point last week, with the recent gains helped by the tone of risk appetite in global markets.

Bloomberg's Alex Longley writes that the average daily volatility of oil prices in August and September was the highest since the beginning of the year. Against this backdrop, money managers are net short Brent crude for the first time ever. With the Federal Reserve's rate cuts easing concerns in financial markets, oil prices are ripe for a rebound.

There could be more rebounds ahead as oil prices are rapidly approaching levels where heavy CTA buying could occur. In addition, Libya is also in turmoil, with production still well below 1 million barrels per day, and inventories at the Cushing storage hub, where U.S. crude futures are priced, remain extremely low.

As Longley concluded, “Given that oil prices frequently overshoot in both directions, it is not surprising to see this rebound momentum.”

The article is forwarded from: Jinshi Data