Oil Futures Show 2012 U.S. Discount Disappearing on Spill: Energy Markets

The discount on New York crude for delivery in 2012 compared with North Sea Brent may disappear as the government restricts drilling after the worst oil spill in U.S. history.

Shipments for two years’ time have been cheaper on the New York Mercantile Exchange than Brent traded on London’s Intercontinental Exchange almost every day since April amid a surplus of West Texas Intermediate crude, the U.S. benchmark blend. With near-term deliveries of WTI regaining their premium as stockpiles diminish, history suggests that longer-dated futures will follow, according to Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania.

“Given that WTI historically trades over Brent, I suspect you will see the longer-dated Nymex WTI contracts move back over ICE Brent,” Schork, whose clients include Citigroup Inc. and Royal Dutch Shell Plc, said in an interview.

The U.S. may lose 4 percent of its daily oil production should President Barack Obama extend a six-month ban on offshore drilling after the BP disaster spilled 4.1 million barrels into the sea, according to the International Energy Agency. At the same time, an oil pipeline under construction from Canada to the Gulf Coast will reduce the supply glut at Cushing, Oklahoma, the delivery point for Nymex crude.

The October 2012 WTI contract on the Nymex has closed below its London equivalent on every day except two since April 6, with the discount averaging 62 cents during the period. It traded today at $1.25 a barrel below Brent. WTI for settlement this October was more expensive until two days ago than Brent for the past three months.

Premium Profit

WTI has traded above Brent 80 percent of the time during the past decade, with the premium averaging about $1.10 a barrel. The blend has a lower sulfur content and density, allowing it to yield a higher proportion of light oil-products such as gasoline, diesel and heating oil.

The last time WTI for next-month delivery regained its premium after a period of trading below Brent, in December 2009, contracts two years into the future followed suit the next month. A trader betting that WTI for October 2015 will revert to its average premium of $1.10 a barrel would make a profit of about $3.10, according to data compiled by Bloomberg.

Obama imposed a six-month ban on new deep-water facilities on May 27. The House of Representatives on July 30 passed legislation imposing unlimited liability on companies responsible for future spills. BP has set up a $20 billion fund to pay for cleaning and compensation for the spill, which was 16 times bigger than the Exxon Valdez accident in Alaska in 1989.

‘Harder to Find’

“The moratorium is another illustration of why the back end’s undervalued,” said Paul Horsnell, head of commodities research in London at Barclays Capital, which correctly predicted in May 2009 that oil would rebound to $80 a barrel last year from $60 at the time. “It’s just another factor that supports the view that in the future oil’s going to be harder to find, there’ll be less of it and it’ll be more expensive.”

U.S. daily oil output may decline by as much as 300,000 barrels should Obama extend the offshore-drilling ban to one or two years, IEA Executive Director Nobuo Tanaka said June 18. Production losses next year may be 100,000 barrels a day, the IEA said on Aug. 11.

Crude stockpiles at Cushing reached 37.9 million barrels in the week ended May 14, the highest since the Energy Department in Washington began keeping records for the region in 2004. The average was 22.9 million barrels.

TransCanada Corp.’s $12 billion Keystone pipeline project may help curtail the surplus. The 3,800-mile (6,200-kilometer) link will move crude from western Canada to the U.S. Midwest and Gulf Coast, which accounts for 43 percent of U.S. refining capacity, according to the Energy Department.

“The pipeline to the Gulf Coast will mitigate the potential for the development of surplus supply in Cushing,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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