WTI/Brent spread near record high despite Cushing stock drop

New York (Platts)--9Sep2011/426 pm EDT/2026 GMT

The WTI-Brent spread has reached epic proportions as the European-based crude continues to trade more than $26/barrel over its US-based counterpart.

Industry participants are hard-pressed to explain the historic premium, as the typical "glut at Cushing" opinion has been shrinking along with stocks at the NYMEX delivery point in Oklahoma.

Crude inventories at Cushing reached a record high of 41.896 million barrels for the week to April 8, but have slowing been falling since then to around 32.689 million barrels for the week of September 2, US Energy Information Administration data shows.

"This is no longer a situation of WTI's relative weakness due to large crude inventories in Cushing, for the inventories there are no longer historically large. Indeed, the inventories at Cushing are actually declining, as indicated by the rather sharp narrowing of WTI's once huge contango," said analysts Dennis Gartman of the Gartman Letter.

The front/second month NYMEX crude spread settled at minus 18 cents/b September 8, in from minus 60 cents/b in early June.

Analysts at Barclays Capital concurred, noting that Cushing stocks have declined for eight of the last 10 weeks and were 2.8 million barrels lower year-on-year.

"Based on this reality, should WTI be at a record discount to other benchmarks? No it should not," the analysts said in a note. "Would the latest fall do much to alleviate WTI's dislocation in relation to other benchmarks? The answer is probably not."

The analysts added that WTI-Brent has stopped being in an equilibrium state for a long time now, beyond being a simple number.

"Physical arbitrage is impossible and the status-quo between WTI and other benchmarks is perhaps simply non-existent," they said.

Analyst Olivier Jakob of PetroMatrix said that while he agrees that Brent should be at a premium to WTI, it should not be as steep.

"The spread is at least $10 overbought," he said. "But the fundamentals only play a small part and when Libya comes back it should impact Brent and its structure but you can't attribute a $26 premium to Libya. Brent's premium started before those events."

MELLITAH EXPORTS AS SOON AS SEPTEMBER 12

The resumption of Libyan exports could narrow the spread but analysts said it will likely be a slow process.

Libya's top oil official expects the production to climb to 1 million b/d in five or six months, and to recover to pre-revolution levels of up to 1.6 million b/d within 15 months.

Nouri Burruien, director of Libya's National Oil Company, told Platts last week that crude production would resume in two weeks and that the condition of the country's oilfields was currently being assessed. Problems at the fields were largely to do with logistics rather than the wells, he said.

Crude traders and shipping sources on Friday said Libya's Arabian Gulf Oil Company is hoping to be able to export Mellitah crude as early as September 12 and has been offering some of the oil in the market.

"If [and] when Libyan crude returns to the market, then we shall see some perhaps rather slow narrowing of the spread between Brent and WTI, but it will be slow and it will be laborious for this crude will return to the market in installments rather than in a rush," Gartman said.

Atlantic basin supply has tightened over the past year, and not just because of Libyan production losses. Loadings of North Sea Forties have declined since the beginning of the year because of problems at the Buzzard field, which feeds into Forties, a main component of the physical Brent/Forties/Oseberg/Ekofisk contract.

Loadings stood at 17.4 million barrels for the month of October 2010, but fell to as low as 9.6 million barrels in August 2011. Further, the actual loadings have often fallen short of projections, leading to uncertainty in the market.

For October 2011, Forties loadings are projected to reach 13.8 million barrels.

"This is a problem of a lack of supply of Brent as the North Sea Brent oil field is growing old and high quality Libyan crude is not yet available despite hopes that the rebel forces there would be able to increase production swiftly," Gartman said.

KEYSTONE PIPELINE

The prompt supply tightness has been reflected in a widening Brent backwardation. The ICE Brent front-month spread settled at $1.25/b September 8, up from minus 4 cents/b on August 8.

Physical price spreads point to a tight European market as well. The physical Forties differential to Dated Brent, for instance, climbed to a record $2.08/b premium last week, up from a slight discount in August.

Prompt physical price differentials for Mediterranean Azeri Light and West African Bonny Light have also been on the rise.

Meanwhile, on the US side of the equation, narrowing the spread may depend on getting more crude from Cushing to the US Gulf.

The increasing availability of Canadian crude in the Midwest with the start of the Keystone pipeline, which carries crude to Cushing, is also widening the WTI/Brent spread, Barclays said.

"The ultimate aim of the Keystone pipeline is to complete the Gulf Coast expansion by 2013, via Cushing, but with very little progress made in even starting up the extension, Keystone is currently seen as a pipeline responsible for causing a Cushing glut rather than offering any takeaway capacity," Barclays said.

--Alison Ciaccio, alison_ciaccio@platts.com
--Jeff Mower, jeff_mower@platts.com

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