Light Louisiana Sweet Premium to WTI Declines to Three-Year Low

Light Louisiana Sweet oil’s premium to West Texas Intermediate narrowed to the lowest level in three years as WTI rallied on speculation that Cushing, Oklahoma, is nearing an operational minimum of crude supplies.

LLS, the light, sweet benchmark on the Gulf Coast, weakened by 95 cents to a premium of $2.75 a barrel at 4:02 p.m., according to data compiled by Bloomberg, the lowest level since Aug. 23, 2010.

WTI for October delivery rose $2.16 to $110.53 a barrel on the New York Mercantile Exchange today, the highest settlement since May 2011.

Crude supplies at Cushing, the storage hub that is the delivery point for WTI futures contracts, fell to 34.8 million barrels last week from 49.7 million on June 28, according to data from the Energy Information Administration.

Supplies may soon hit the minimum level that storage tanks need to hold to operate normally, said Amrita Sen, chief oil market analyst at Energy Aspects Ltd. in London. That would cause WTI to rise relative to waterborne crudes as buyers tried to keep more oil in the tanks, she said.

“It will be led by a massive spike in WTI backwardation and the only way to refill Cushing will be through run cuts, which you will achieve through the price spike eating into Midwest refinery margins,” Sen said by e-mail.

It’s unclear what the operating minimum level in Cushing is. Cushing had 79.8 million barrels of storage capacity in March, according to the EIA. Storage tanks need to maintain 8 to 10 percent of capacity to maintain normal operations, said Bruce Heine, a spokesman for Magellan Midstream Partners LP (MMP), which operates storage tanks in Cushing.

Operational Minimum

That would make operational minimum about 8 million barrels. Sen said that blending of different types of crudes means that the level is higher, closer to 25 million barrels. Andy Lipow, president of Lipow Oil Associates LLC in Houston, said the operational minimum might be 35 million.

Heavy Louisiana Sweet oil also weakened relative to WTI, falling $1 to a premium of $3.60 a barrel. Mars Blend weakened by $1 to a $1.25 discount.

Poseidon crude weakened by 25 cents to a $1.50 discount. Crude from the Southern Green Canyon, which is delivered to Texas instead of Louisiana, weakened 50 cents to $2 below WTI. Thunder Horse crude weakened by $1.05 to a premium of $1.20.

To contact the reporter on this story: Dan Murtaugh in Houston at dmurtaugh@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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