Traders question Louisiana infrastructure for new oil storage contract

By Catherine Ngai

NEW YORK, March 4 (Reuters) - A novel oil futures storage

contract, which debuts as the market struggles to find places to

stow oil stockpiles, may flounder because of infrastructure

constraints, traders say.

On Wednesday, CME Group Inc (NasdaqGS: CME - news) said it was starting a

physically delivered crude oil storage futures contract at the

end of March. Under the agreement, each futures contract

represents the right to store 1,000 barrels of crude at LOOP

LLC's Clovelly Hub in Louisiana.

The contract is set to begin trading on March 29 for trade

day March 30, pending regulatory approval. Neo Markets Inc will

host monthly auctions of physical storage on its platform.

The move coincides with both the U.S. storage hub of Cushing

and the U.S. Gulf Coast market trading in a contango, a market

structure where the near term price is cheaper than that in the

future. Meanwhile, traders have rushed to secure storage tanks

in Cushing and the Gulf, locking in deeply discounted oil today

to sell at higher rates later.

"I think storage is a really useful mechanism for risk

management irrespective of the market in contango today. It

happens to be more valuable today and probably in greater

demand," said J. Robert Collins, Jr., co-chief executive officer

and president at NEO Markets.

With opaque storage rates in Cushing and Houston, the

transparency could be refreshing to the market, some traders

say. The CME Group says the contract will help customers manage

storage price risk.

The uncertainty, traders say, is that for a liquid storage

contract to make sense, it will require enough physical

infrastructure to demand hubs including refinery row in the

Houston area.

HOUSTON BOUND

The LOOP has a few major pipelines that bring crude into and

out of the facility. Of the outbound carriers, the largest is

the 1.7 million barrel per day LOCAP pipeline, operated by the

LOOP, which connects Clovelly to the St. James, Louisiana, hub

some 54 miles North. There, crude can be dispatched to

refineries such as ExxonMobil Corp's Baton Rouge

refinery or Motiva Enterprises' Convent refinery.

Crude at St. James can also move to other pipelines such as

Marathon Petroleum Corp's Capline.

Some traders indicated, however, that moving different

grades in and out of the LOOP can be difficult, with one citing

that it's a "pain due to the lack of connectivity."

"Right now, there's no way to get barrels from the LOOP to

the Houston market," said Sandy Fielden, an analyst at RBN

Energy. "There's no pipeline from Louisiana to Texas, Port

Arthur or the Houston Ship Channel. There's a limited

functionality in the short term."

Shell (LSE: RDSB.L - news) plans to start up its St. James to Texas Westward Ho

Pipeline in 2017.

LOOP imports have fallen in recent years from about 315.2

million barrels in 2012 to 209.3 million barrels in 2014, data

from Louisiana's Department of Natural Resources show.

Still, the start of a crude storage benchmark could be the

standard for other crude storage benchmarks, others say.

"It could be worth trying, we'll see," said a trader.

(For a graphic on LOOP imports: http://reut.rs/1GTZoQI)

Carriers into and out of the LOOP

Inbound Carriers Pipeline Connecting

Shell 24 inch Houma Nederland, Texas to

Clovelly the Clovelly Hub and

pipeline Deepwater Gulf of

Mexico to Clovelly hub

LOOP 48 inch LOOP Connects U.S. ports

Main Oil Line with the Clovelly hub

for waterborne

movements; connects

international ports to

the Clovelly hub for

waterborne movements

BP, Shell 24 inch Mars Oil Deepwater Mars and

Pipeline; Amberjack production

600,000 bpd; 161 streams with Clovelly

miles hub

BP Endymion Deepwater Gulf of

Pipeline Co, Mexico Thunder Horse

750,000 bpd; 89 and Thunder Hawk

miles production streams

with the Clovelly Hub

Outbound Carriers

LOOP LOCAP, Connects Clovelly hub

throughput with St. James,

capacity of 1.7 Louisiana market

million

expandable to

2.4 million; 54

miles

Shell 24 inch Clovelly

Norco Pipeline

Plains All 24 inch CAM Clovelly to Meraux

American pipeline

Data provided by LOOP

(Additional reporting by Jessica Resnick-Ault; Editing by Grant

McCool)