Oil Climbs as WTI-Brent Spread the Narrowest in Eight Months

  • WTI crude rises before U.S. inventory report, Fed meeting
  • U.S. stockpiles forecast to have gained 2 million barrels

Oil rose as the difference between U.S. and global benchmark prices narrowed to the smallest in eight months amid rising North Sea deliveries and falling stockpiles at the largest U.S. storage hub.

The spread between West Texas Intermediate and Brent closed at $2.04, the least since January. A narrowing spread signals that the global supply glut is growing while there may be relative tightening in parts of the U.S. Stockpiles at Cushing, Oklahoma, the delivery point for WTI traded in New York, fell 1 million barrels last week in a Bloomberg forecast.

Output of North Sea grades will reach the highest level in more than three years in October, according to loading programs compiled by Bloomberg. Front-month Brent contracts traded near their deepest discount to later-dated contracts since June, a sign of intensifying concern about the supply glut.

"The narrowing spread is a reflection of the surprisingly high volume of output from the North Sea," Bob Yawger, director of the futures division at Mizuho Securities USA in New York, said by phone. "Falling Cushing stocks are also putting pressure on the spread."

Oil has slumped about 30 percent from its 2015 peak in May amid signs excess supply will persist. Prices reached six-year lows in August as a Chinese slowdown raised the prospect of lower demand. Goldman Sachs Group Inc. said last week that the excess is bigger than it initially anticipated and crude could fall as low as $20 a barrel.

Growing Contango

WTI for October delivery increased 59 cents, or 1.3 percent, to settle at $44.59 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 20 percent above the 100-day average at 4:44 p.m.

Futures extended gains after the American Petroleum Institute was said to report U.S. crude supplies slipped 3.13 million last week. The contract traded at $45.15 at 4:44 p.m.

Brent for October settlement, which expired Tuesday, rose 26 cents, or 0.6 percent, to $46.63 a barrel on the London-based ICE Futures Europe exchange. The more-active November contract gained 40 cents to $47.75. The spread -- or contango -- on front-month compared with the next-month contract widened to $1.12, the most since June 15.

Material Oversupply

“It signifies a material oversupply,” Seth Kleinman, head of energy strategy at Citigroup Inc. in London, said by phone of the expanding spread. “U.S. production is not going down fast enough given the continuous growth we seem to be having from OPEC.”

WTI gains eased briefly after White House spokesman Josh Earnest said that President Barack Obama doesn’t back a Republican bill to end the nation’s crude export ban. House Majority Leader Kevin McCarthy will announce that he’ll schedule a vote on a bill to lift the country’s crude-export ban in last week of September, The Wall Street Journal reported.

"The idea an export deal would get through was pie in the sky to begin with," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone.

U.S. crude supplies probably rose by 2 million barrels last week, adding to stockpiles already 100 million barrels above the seasonal norm, according to a Bloomberg survey. The projected U.S. stockpile gain coincides with a drop in refiners’ operating rates as gasoline demand slips with the end of summer. Cushing supplies fell in the last two weekly reports from the Energy Information Administration while the nationwide total climbed. 

Federal Reserve

Investors also await Thursday’s Federal Reserve announcement on interest rates. The odds of an increase this week held near 30 percent, down from more than 50 percent before China roiled markets with its currency devaluation last month.

"We’re bouncing against the bottom ahead of Thursday’s Fed decision and Wednesday’s EIA data," Yawger said. "The impact of the overall build in supplies is tempered by the declines at Cushing."

Increasing supplies from OPEC members such as Iraq are adding to the surplus, Citigroup’s Kleinman said. Iraq plans to increase exports of crude from its southern region by 26 percent next month, according to a loading program obtained by Bloomberg News.

The Organization of Petroleum Exporting Countries trimmed its estimates for growth in output from outside the group next year by 110,000 barrels a day in its monthly market report.

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