Goldman Sees Brent-WTI Spread Narrowing as Inventories Fall

The widening spread between U.S. and European crude is “not sustainable” as falling inventories at the storage hub in Cushing, Oklahoma, will bolster the price of the nation’s benchmark oil, Goldman Sachs Group Inc. said.

The bank, which said its earlier recommendation to buy West Texas Intermediate crude has made a loss of 10.8 percent, recommended investors buy WTI futures for delivery in June 2013, and sell those for Brent in anticipation that a pipeline from Cushing to the U.S. Gulf Coast will help reduce surplus inventories. WTI is at a discount of about $17.50 to Brent today, compared with $15 a month ago. WTI’s discount to Canadian grades will also discourage the import of crude that led to a build-up this year at Cushing, Goldman Sachs said.

“We continue to believe that the WTI-Brent spread will tighten significantly,” David Greely, a New York-based analyst at Goldman Sachs, said in an e-mailed report. “With WTI now pricing near parity or below Canadian grades, we expect flows into Cushing will slow, accelerating the draw on Cushing inventories and putting greater upward pressure on WTI prices.”

WTI futures for October delivery were at $97.32 a barrel on the New York Mercantile Exchange, compared with $114.84 for Brent at 5:05 p.m. London time. Stockpiles at Cushing, which can drive the spread between the two contracts, were at 45.2 million barrels on Aug. 10, compared with a peak of 47.8 million on June 1, according to the Energy Department. Brent’s premium has also risen as oilfield maintenance in the North Sea and sanctions against Iran cut supply of comparable blends.

Seaway Pipeline

Goldman Sachs said that it is “rolling” the loss-making advice to buy September 2012 WTI futures into a recommendation to buy the S&P GSCI Brent Crude Total Return index.

The Brent-WTI spread is more likely to converge in 2013 than this year as Enbridge Inc. and Enterprise Products Partners LP boost capacity through their Seaway pipeline, which pumps crude from Cushing to refineries on the Gulf Coast, Goldman Sachs said. The potential for a release of emergency oil stockpiles by the U.S. government this year, which would reduce WTI prices, also makes a 2013 trading position more suitable, the bank said.

The Obama administration is monitoring oil markets and a release from the nation’s Strategic Petroleum Reserve remains “an option that is on the table” if prices rise or supply is disrupted, said Josh Earnest, a White House spokesman, said on Aug. 17. Still, the impact of such intervention would be “relatively limited” on prices, Goldman Sachs predicted.

The gap between Brent and WTI widened to $22.28 a barrel on Aug. 15, the most since October.

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