WTI-Brent Spread Near Narrowest in Two Months on Keystone

West Texas Intermediate narrowed its discount to Brent to the least in more than two months following the start of a pipeline carrying crude out of Cushing in Oklahoma, the delivery point for U.S. futures.

The spread between WTI and Brent on the ICE Futures Europe exchange shrank to $9.58 a barrel today, the smallest gap since Nov. 8. The Gulf Coast line, the southern leg of the Keystone XL pipeline, is initially transporting 288,000 barrels of light, sweet crude a day to Nederland in Texas. WTI has also been supported as a winter storm sweeping across the U.S. spurs demand for heating fuel.

“You needed Keystone XL south to have started for investors to go long WTI with confidence,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd., who predicted two weeks ago the spread would narrow. “The logic for Cushing emptying is that outgoing capacity is to be more than incoming capacity and with the starting of Keystone XL south that capacity increase should finally materialize.”

WTI for March delivery slipped as much as 72 cents, or 0.7 percent, to $96.60 a barrel in electronic trading on the New York Mercantile Exchange and was at $97.08 as of 1:18 p.m. London time. It settled at $97.32 yesterday, the highest close this year. The volume of all contracts traded was 28 percent more than the 100-day average. Prices are up 2.9 percent since Jan. 17, the biggest weekly gain since Dec. 6.

Brent for March settlement slipped as much as $1.35, or 1.3 percent, to $106.23 a barrel on the ICE exchange. The grade has advanced about 0.2 percent this week.

Cushing Pipeline

TransCanada Corp.’s (TRP) pipeline will increase flows over the course of the year toward its 700,000-barrel capacity and carry more heavy crude from Canadian oil sands formations, executives said at a press conference in Calgary on Jan. 22.

“The Keystone XL south is about to increase arbitrage between Cushing and the Gulf Coast,” which will cause inventories at Cushing to decline, said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. WTI’s discount of about $10 to Brent remains too wide for the longer-term, he said.

U.S. distillate inventories, including heating oil and diesel, slid by 3.21 million barrels last week, the Energy Department said yesterday. Supplies were projected in a Bloomberg News survey to shrink by 500,000 barrels. Refinery utilization fell to 86.5 percent of capacity, the lowest rate since October, the department reported.

Frigid Temperatures

“A big drop in distillate and refinery runs shows that the weather had more impact on production and demand” than expected, Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by e-mail today.

Frigid temperatures and snowstorms have struck from the Midwest to the East Coast for the second time this month, crimping operations at refineries.

U.S. crude inventories expanded by 990,000 barrels to 351.2 million, ending a seven-week run of decreases, said the Energy Information Administration, the Energy Department’s statistical arm. Supplies were forecast to climb by 1.15 million, according to the median estimate of 10 analysts in the Bloomberg survey.

WTI may decline next week amid speculation that U.S. crude supplies will increase, a separate Bloomberg survey showed. Seventeen of 36 analysts and traders, or 47 percent, forecast crude will fall through Jan. 31. Eleven respondents projected an increase and eight said prices will be little changed.

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

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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