Next Year’s Super Bowl (February 3, 2013) will provide the usual mix of brawn and hokey consumer advertising. RBN is betting that the WTI discount to Brent will fall well below its current $22.76 /Bbl before then. Early next year new pipeline pathways out of the Midwest and West Texas to the Gulf Coast and growing railcar traffic out of the Bakken will put an end to the Cushing Supply glut. Important signals today suggest the WTI discount should narrow sooner, but prices for the two crudes remained stubbornly far apart last week. Today we explain why the spread hasn’t narrowed already and the fundamental pressures that will overwhelm it come the spring.
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West Texas Intermediate crude (WTI), the US domestic benchmark and Brent crude, the benchmark for crude sold in Europe, Africa and the Middle East are both light sweet crudes with similar refining qualities. WTI has a gravity of 39.6 API degrees and sulfur content of 0.24 percent. Brent has a gravity of 38.06 API degrees and sulfur content of 0.37 percent. Historically, WTI and Brent prices tracked closely, with WTI generally having a slight premium over Brent. Since August 2010 WTI has traded consistently at a discount to Brent that ballooned out to $27.68 /Bbl in October 2011 and has averaged over $16/Bbl this year.
We last reported on the much followed Brent/WTI crude oil price relationship in July (see A Bridge Too Far). Back then we pondered the fate of the WTI discount to Brent that has had market watchers and traders busy polishing their crystal balls since last November (2011). That is when Enbridge and Enterprise announced their project to reverse the Seaway pipeline between Cushing, OK and Houston, TX and thereby begin to relieve a stockpile of crude at Cushing.
You can see the whole story in the chart below. The blue line is the WTI discount to Brent against the left axis in $/Barrel. The red line is the Cushing crude oil stock position (reported by the Energy Information Administration – EIA) in million barrels against the right axis. Back in July 2010, WTI was trading at a slight premium to Brent that reversed to a discount in August 2010. Since then the WTI discount to Brent widened out to stay above $10/Bbl except for a brief period in December 2011 (after the first Seaway reversal announcement). For the past week (starting Monday October 8, 2012) the WTI discount has been trading above $20.00/Bbl. Between January and July 2012, Cushing inventories surged to record levels. The opening of the Seaway pipeline to the first crude flows in June 2012 did not result in a decline in the stockpile until July 2012. Since that time, Cushing stocks have fallen by 3 MMBbl (7 percent) to 44.2 MMBbl although the pace of the fall has slowed in the past two weeks and Cushing stocks rose last week (October 6, 2012 data). As you can see from the green circle on the chart, the fall in Cushing stocks since July appears to have coincided with a widening of the WTI discount to Brent when logically we might have expected it to narrow in the face of the Seaway pipeline opening and the reduction in Cushing stocks. Instead the WTI discount to Brent for prompt delivery crude has widened to more than $20/Bbl again this week.
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