Cushing Glut Weakens U.S. Crude Against Brent: Energy Markets

Oil for July delivery in New York is weakening relative to London contracts as inventories at the U.S. storage hub rise to record levels.

West Texas Intermediate crude for July delivery sells for $1.97 a barrel below the corresponding contract for North Sea Brent, more than double the discount of 71 cents on May 10. When the June Brent contract expired on May 14, the corresponding WTI future was $5.57 a barrel cheaper.

The discount for July crude in the U.S. may expand further as June WTI contract expires this week and traders switch to the next month, say Credit Suisse AG and Commerzbank AG. Crude stockpiles in Cushing, Oklahoma, where Nymex futures are delivered to settle contracts, reached 37 million barrels, the Energy Department said last week, the most since it began reporting the data in April 2004.

“It’s a nice trading opportunity,” said Eugen Weinberg, a senior analyst with Commerzbank AG in Frankfurt. “Brent will continue to trade above WTI for quite some time. There’s been a strong increase in Cushing stocks and maintenance in the North Sea. It will probably widen, but it won’t be $5.”

Brent prices, traded on London’s ICE Futures exchange, soared above WTI last month for the first time since December, as imports of Canadian crude and maintenance at regional refineries caused Cushing supplies to accumulate.

Spread May Widen

July WTI futures will receive a wider discount once the June contract expires should investors conclude that ample inventories persist, said Tobias Merath, head of commodity research at Credit Suisse Group AG in Zurich.

“It’s fairly likely the spread between these two will widen,” Merath said. “I’m very doubtful we’ll see convergence in the next couple of weeks.”

As well as keeping WTI prices below Brent, the glut of supply in Cushing has also exacerbated the Nymex contract’s contango, with prompt prices cheaper than those for later delivery. July WTI settled at $73.22 a barrel yesterday, $1.84 less than the August contract, while the gap between July and August futures for North Sea Brent was smaller, at $1.01.

WTI futures on the New York Mercantile Exchange exceeded Brent crude by about 39 cents on average during the past three years. New York crude costs more in part to reflect the better quality of oil and to reflect the cost of shipping crude from New York to the U.S.

Normalizing Over Time

The risk is that futures markets show the spread moving closer to its historic average in the months ahead as U.S. refineries reduce Cushing inventories as they boost operations to meet summer demand for driving fuels, reducing Cushing inventories. Brent’s premium over WTI in October is 66 cents to WTI.

“The market is pricing in for a normalization of this spread over time,” said Credit Suisse’s Merath. “If Cushing inventories peak it could be a matter of weeks before the spread narrows a bit.”

Goldman Sachs Group Inc. analysts led by Jeffrey Currie said in a research report yesterday that WTI oil futures will “reconnect with the broader market within weeks.”

The breakdown of the traditional Brent-WTI relationship was one reason why Saudi Arabia’s state oil company dropped WTI as its U.S. pricing benchmark last year, in favor of another index using Gulf Coast crudes.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE