WTI-Brent spread narrowing as US exports record fuels

By Grant Smith
Bloomberg News

The price gap between the world’s two biggest oil benchmarks probably will narrow next year as U.S. exports of refined fuels reach a record and crude supply from the Middle East and North Africa expands.

West Texas Intermediate, the U.S. benchmark, will average $6 a barrel less than Europe’s Brent in 2014, from $11.65 now, according to Commerzbank AG. Goldman Sachs Group Inc. is predicting $9 and Barclays Plc $8.30. The world’s most-traded energy spread already contracted 39 percent from the eight-month high of $19.01 reached Nov. 27.

While the U.S. is pumping the most crude oil in a quarter century, laws prohibit most exports, driving down costs for domestic refiners and spurring record shipments of everything from diesel to gasoline that will diminish stockpiles. The forecasters expect Brent prices to weaken as regional supply recovers, led by Iran and Libya.

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“The continuing arbitrage for oil products out of the U.S. is going to move WTI higher,” said Eugen Weinberg, the head of commodities research at Commerzbank in Frankfurt. “We’re likely to see negative surprises for Brent because right now the market is not yet pricing in the return of Libyan and Iranian barrels.”

Brent futures for February settlement on ICE Futures Europe in London traded at $110.50 a barrel today, $11.75 more than the corresponding WTI contract on the New York Mercantile Exchange. The spread averaged $10.64 since the start of January, rose as high as $23.44 on Feb. 8.

Pipeline Capacity

WTI also may rise because of expanding pipeline capacity from Cushing, Oklahoma, where the crude is priced, to America’s refining hub on the Gulf Coast. Stockpiles of 40.6 million barrels at Cushing are 17 percent lower than a year ago, government data show.

TransCanada Corp. plans to start the Gulf Coast section of its Keystone pipeline transferring crude from Cushing to Port Arthur, Texas, next month, the Calgary-based company told shippers in a bulletin on Dec. 6. The link has the capacity to carry 700,000 barrels daily.

Crude shipments to the Gulf Coast from the Midwest, which includes Cushing, averaged about 14.5 million barrels a month in the first nine months, almost double the flow in 2012 and heading for the highest level in Energy Department data that starts in 1986.

Supply Disruptions

“We might see a shortage of pure WTI barrels, given the amount of diversions away from Cushing,” said Miswin Mahesh, an analyst at Barclays in London.

Brent is more sensitive to global supply disruptions and that means fewer interruptions to output in the Middle East and North Africa will probably drive prices lower, Commerzbank’s Weinberg said.

About 1 million barrels of daily Iranian output may be restored if international sanctions are lifted, Weinberg said. The acceleration of Libyan exports, curbed by protests this year at terminals, may also boost supply, he said.

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The WTI-Brent spread probably will remain volatile next year as stockpiles at Cushing fluctuate, Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen, said by phone on Dec. 13. The spread swung from $23.18 to 20 cents this year, on a closing basis.

Bank of America Corp. predicts an average spread of $13 in 2014 because of a glut of U.S. production. Domestic refiners probably aren’t able to absorb all the extra supply by cutting imports because their plants are designed to handle heavier grades, Francisco Blanch, the bank’s head of commodities research in New York, said in a report Nov. 26. Bank of America reiterated its forecast Dec. 11.

Maintenance Peaks

Goldman Sachs also is anticipating volatility in the spread next year, with moves above $12 during peak refinery maintenance periods, the bank’s analysts, led by Jeff Currie in New York, wrote in a report Dec. 6. Maintenance typically peaks toward the end of the first and third quarters.

U.S. crude production expanded to a 25-year high of 8.075 million barrels a day in the week ended Dec. 6, according to government data. Exports of gasoline, diesel and other refined fuels reached a record 3.79 million barrels a day in July, Energy Information Administration data show.

The surge in U.S. sales of refined fuels is hurting European refiners already contending with higher costs for their feedstock priced off Brent, according to Petromatrix GmbH, a consultant in Zug, Switzerland.

European Refineries

MOL Hungarian Oil & Gas Plc said in October it will convert the Mantova refinery in Italy to a fuel storage and distribution facility. It will be the 16th European plant to close or reduce capacity since 2008, Toril Bosoni, an analyst at the International Energy Agency said Nov. 27.

“The thing with European refiners is that they are getting a double-hit,” Olivier Jakob, Petromatrix’s managing director, wrote in an e-mail Dec. 17. “They have to pay the higher Brent-based crude oil basis, but then on the other hand are also getting flooded by the U.S. oil products.”