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Brent's Biggest Premium to WTI in Nine Months May Collapse: Energy Markets

Brent oil’s premium to West Texas Intermediate crude is poised to collapse from the highest level in nine months as strengthening U.S. demand may cut record inventories at the Cushing, Oklahoma, delivery hub.

WTI traded on the New York Mercantile Exchange may overtake London’s Brent during summer, the peak U.S. gasoline-demand period, as the economy expands and refineries run at the highest seasonal rate in five years. In past three years, the U.S. grade exceeded the benchmark European crude two-thirds of the time.

Full storage tanks at Cushing, the delivery point for Nymex’s light, sweet crude oil futures, the world’s most actively traded commodity contract, have helped to undermine WTI’s traditional premium to Brent. The pipeline hub routes Gulf Coast oil to Midwestern refiners and Canadian oil to plants in Texas and Louisiana.

The conclusion of maintenance at Midwestern refiners will cause “the negative spread between WTI and Brent to reverse,” said Allison Nathan, a Goldman Sachs Group Inc. analyst based in New York, in a report this week. She said the lack of available storage at Cushing would be resolved in “weeks” and recommended selling Brent and buying WTI.

Brent traded on the London-based ICE Futures Europe Exchange cost $4.68 a barrel more than WTI, the widest premium since Aug. 14. Oil for June delivery on the Nymex dropped 23 cents to $76.14 as of 10:47 a.m. London time, while Brent for June settlement gained 37 cents to $80.86 a barrel.

“It’s all about Cushing,” said Michael Fitzpatrick, vice president of energy at MF Global in New York. “Stockpiles are near to overflowing at Cushing.”

Cushing Inventories

Inventories at the hub increased 1.68 million barrels, or 4.9 percent, to 36.2 million in the week ended April 30, the Energy Department reported last week. That’s the largest amount in data going back to 2004. U.S. imports jumped 2.8 percent to 9.95 million barrels a day, the highest level since July.

“The spread’s not going to return to normal until somebody actually stops importing crude oil into the U.S.,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The price signal is here, but so far nobody has responded to that signal.”

In other markets, U.S. gasoline demand at the pump rose 1.4 percent from a 10-week low in the week ended May 7 as fuel consumption increased before the beginning of the peak driving season on May 31, MasterCard Inc. said in its SpendingPulse report yesterday. The average pump price for regular gasoline rose 5 cents to $2.91 a gallon, the highest level since Oct. 17, 2008. Prices are 37 percent above a year earlier.

U.S. refineries ran at a 23-month high of 89.6 percent of capacity in the week ended April 30, the Energy Department said.

Oil Spill

The widening oil slick from a BP Plc well leaking about 5,000 barrels a day following an explosion that sunk the Deepwater Horizon rig in the Gulf of Mexico last month may cause shipping disruptions that would curb imports. BP diverted an oil tanker to Europe from the Gulf.

States along the Gulf of Mexico accounted for 58 percent of U.S. oil imports, according to the Energy Department.

“The interesting thing will be if the oil spill prevents imports or reduces imports into the Gulf and brings Cushing down, which seems quite possible over the next few weeks,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

About 5.81 million barrels a day of oil was brought into the U.S. through Gulf states in the week ended April 30.

“Once we do see delays, Cushing is going to start getting drawn down very quickly,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. Alternatively, the Brent premium could strengthen as foreign oil seeks other U.S. ports, such as on the U.S. East Coast, he said.

Demand Forecasts

The Energy Department and OPEC increased their 2010 forecasts for oil consumption this week, citing economic growth, particularly in China and emerging markets.

The Organization of Petroleum Exporting Countries, responsible for about 40 percent of the world’s oil, boosted its forecast for worldwide crude consumption this year by 180,000 barrels a day, or 0.2 percent, to 85.38 million barrels a day. The U.S. raised its outlook to 85.55 million from 85.5 million last month.

Brent has been supported as daily shipments of the four North Sea crude grades that determine the price of Dated Brent were forecast to drop 22 percent in June to the lowest level since August 2007, according to data compiled by Bloomberg. Dated Brent is the benchmark for two-thirds of the world’s oil.

Brent was also bolstered last week as Royal Dutch Shell Plc suspended export obligations on Nigeria’s Bonny Light crude oil for May and June after production was reduced by a fire on a pipeline in the Niger Delta. Bonny Light is priced against Brent.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

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