Brent crude – WTI premium for selling again?

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WTI-Brent premium back to over $18 per barrel. 

The WTI Cushing discount to Brent remained at historically elevated levels of about $20/barrel in early April but, as the month progressed, it narrowed noticeably. At the end of April the discount was $14.8/barrel and for the month averaged $17.2/barrel, against $18.4/barrel in March. 

The pronounced narrowing of the WTI discount reflected the evolving market dynamics for WTI and Brent. A combination of lessening tension between Iran and the West over Iran’s nuclear programme was bearish for Brent while the previously mentioned Seaway reversal decision timing was bullish for WTI. May was uneventful for the WTI-Brent discount. The average for the month was $16/barrel. 

During June the WTI-Brent spread narrowed significantly and by 20 June was down to $10.3/barrel, the narrowest since January 2012. For June as a whole, the discount averaged $13.2/barrel. The June narrowing tended to be driven by mounting economic concerns relating to Europe. By late June, however, the WTI discount was widening again and by end month was at $12.0/barrel. The discount continued to widen through mid-July and by 19 July was at $18/barrel. 

A resumption of the widening trend of late reflects the resurfacing of Iranian concerns and the backwash of the Norwegian offshore service industry strike. Both factors have a greater bearing on Brent than WTI. US crude oil output overall has been buoyant in 2012 driven by the strong trends in Texasand North Dakota together with some other lower 48 states, such as Colorado, New Mexico and Oklahoma. In April US production was running at 6.13mmb/d, down 2% on the previous month but up 10% on a year earlier. Cumulatively US production has risen 11% in 2012 and is at the highest level in 14 years. Growth in US production in 2012 has continued be constrained by the weak trends in Alaska, California and the Gulf of Mexico. 

Outlook for the WTI-Brent spread: The WTI discount should ultimately fall to $4-5/barrel in the absence of major facility outages, strikes, weather-related issues or geopolitical concerns we would expect to see the WTI-Brent discount narrow moderately over the balance of 2012. The key factor here is the recent upgrade to the take away capacity at Cushing through the start-up of theSeaway pipeline. This together with improved rail links to the Gulf Coast refineries should constrainsomewhat the build-up of inventories at Cushing. 

Below is a chart of the Brent:WTI Light Sweet premium and its evolvement over the last 3 years – you can see that it is back towards the upper end of this range. 

At this stage we only expect a moderate narrowing of the WTI-Brent spread given the modest capacity of the Enbridge Seaway pipeline of 150,000b/d. Bearing this in mind, we would expect to see the WTI discount average around $14/barrel in the third quarter of 2012 and perhaps $12/barrel in the fourth quarter. If there is a resurgence in political tension between the West and Iran over Iran’s nuclear programme in the coming months, the spread is likely to widen dramatically given the fears that would be engendered concerning a disruption to Middle Eastern supplies.

Clearly, Middle Eastern developments are of greater significance for an international grade such as Brent than for the inland US grade, WTI. Potentially the impact of the Seaway pipeline on the WTI-Brent spread will increase in 2013 as capacity is expanded to 400,000 b/d.

Significantly, the expansion has recently been brought forward from the first quarter of 2013 to the fourth quarter of 2012. Abstracting from a major geopolitical crisis or perhaps further North Sea outages we believe the WTI discount is likely to drop to less than $10/barrel in 2013. 

Ultimately the discount should decline to perhaps $4 to $5/barrel, which is slightly above the proposed pipeline tariff for uncommitted shipments. 

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