Thursday, February 7, 2013
The Brent-WTI Crude Oil spread has widened more than $3 over the past five sessions to over $20. The continuing problems with the Seaway Pipeline have led to bottlenecks, resulting in an increase in inventory levels at the NYMEX delivery point in Cushing, Oklahoma. The Seaway pipeline transports Crude Oil from Cushing to refineries along the Gulf Coast. The bottlenecks can be seen as a temporary condition, suggesting the spread could, potentially, tighten once the pipeline begins flowing at normal capacity.
Fundamentals
Brent Crude Oil continues to trade at a hefty premium over the WTI contract, despite being a poorer grade of petroleum, for a variety of reasons. First and foremost, there have been supply imbalances in recent years. WTI Crude Oil is priced based on Cushing as delivery point, and Cushing has seen a flood of supply in recent years from sources outside the Permian Basin, such as North Dakota and Canada. WTI is an excellent benchmark for North American supply and demand, but it has lost touch with the global market. Brent has become the true global benchmark for prices, as it represents Oil destined for Europe and other areas. While North America has remained well supplied, the same cannot be said for Europe, West Africa and Asia. There is also no set position limit in the Brent Crude Oil contract, while there is a position limit in the NYMEX WTI contract. This has attracted funds and other large investment vehicles, such as long-only funds, to the Brent contract. Because of the supply imbalances between the US and much of the rest of the world outside of North America, there likely needs to be a downward shift in global demand,or Oil needs to start flowing from Cushing to the Gulf for the spread to tighten significantly. Yesterday's EIA data showed Cushing supplies at a one-month low, indicating that suppliers have probably been using railcars to avoid bottlenecking at the hub. Even with supplies at a one-month low, the US and Canadian spot markets remain oversupplied at the moment. New Iranian sanctions aimed at preventing the OPEC nation from repatriating Oil payments into Dollars and Euros could result in an even greater disconnect between North American supply and demand economics and the rest of the globe.
Technical Notes
The continuous CL/IB chart shows the spread making a failed attempt to narrow to the -15.00 mark in mid-January. Initially, it looked as though the year-long trend of the spread widening may be reversing course, but the failure of the spread to cross through -15.00 suggests that the spread could remain range-bound, or possibly widen further if the -22.00 level is breached.
Rob Kurzatkowski, Senior Commodity Analyst