WTI-Brent 16-Month Low Pits Goldman Against BofAGrant Smith
The collapse in the price difference between the world’s two most-traded crude oil grades is fulfilling a prediction Goldman Sachs Group Inc. has held for more than a year. Bank of America Corp. says it won’t last.
Brent crude’s premium to West Texas Intermediate slumped more than 50 percent to a 16-month low in the past two months, falling to less than $10 a barrel for the first time since January 2012. The differential narrowed to as little as $8.66 a barrel today, after rising to a record $28.08 in October 2011. Brent was typically cheaper in the past decade, averaging $1.28 a barrel less than WTI, according to data compiled by Bloomberg.
The spread “has been extremely volatile, moving one way and then another,” said Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug, Switzerland. “The question remains of where is the equilibrium price.”
The divide between Brent, a gauge for more than half the world’s oil, and WTI, the U.S. benchmark grade, has narrowed as North Sea supplies resumed following oilfield maintenance, while a switched pipeline began relieving a glut of crude at America’s oil hub at Cushing, Oklahoma. Credit Suisse AG and Barclays Plc said in 2011 that the Cushing gridlock had made WTI so cheap relative to Brent, that the U.S. grade was losing its relevance as a global benchmark.
Brent has lost 7.4 percent this year and settled at $102.85 a barrel on the London-based ICE Futures Europe exchange today, after the restart of North Sea oil fields such as Buzzard and Elgin-Franklin in March. WTI on the New York Mercantile Exchange climbed $2.96 to $93.99 a barrel today, leaving prices up 2.4 percent in 2013, as projects including Enterprise Products Partners LP and Enbridge Inc.’s Seaway pipeline eroded the glut at Cushing.
Goldman Sachs has said since February 2012 that the gap would narrow, reiterating April 23 that it would shrink to about $5 a barrel in the third quarter as refiners in the Midwest boost operations after seasonal maintenance work and new U.S. supplies from Texas are redirected away from Cushing.
“The entire balance at Cushing will shift from a small surplus into a pretty significant deficit over the next couple of months,” Stefan Wieler, a senior economist at Goldman Sachs in New York, said in a telephone interview on April 30. “The bottleneck between Cushing, Oklahoma, and the Gulf Coast is starting to disappear. There are a number of pipelines that have been added, reversed or expanded that will make this happen.”
Enterprise and Enbridge’s Seaway pipeline transported 302,000 barrels a day from Cushing to the Gulf Coast in the week to April 26 after flows through the link were reversed last year, remote-sensing company Genscape Inc. said yesterday. Magellan Midstream Partners LP’s Longhorn line, Sunoco Logistics Partners LP’s Permian Express, and TransCanada Corp.’s Keystone XL project are also set to divert crude from Cushing.
For Bank of America, the narrowing of the spread is temporary, with the difference poised to rebound to $21 a barrel in the third quarter, according to an April 17 report.
“The market knows that this is all coming on stream, and is positioned for that,” Sabine Schels, a commodity strategist at Bank of America in London, said in an interview yesterday. “Our worry is that that production growth will eventually outpace the growth in pipeline capacity. And more importantly, what are refiners going to do with all that crude?”
Refiners on the Gulf coast aren’t configured to process the additional low-density, or “light,” crude being produced, according to the bank.
“By the end of this year, the market will catch on to the fact that we’re just going to push the inventories in Cushing down to the Gulf coast,” Schels said. “That should lead to a wider spread again.”
The Bank of America and Goldman WTI-Brent predictions are among the most divergent of analyst estimates compiled by Bloomberg. The median forecast for the third quarter is about $15 a barrel, and $12 for the fourth quarter, according to 36 analyst predictions for WTI and 38 for Brent. Citigroup Inc. and Standard Chartered Bank Plc predict that the gap will end the year close to current levels, averaging $10 a barrel in the fourth quarter.
While “U.S. shale oil production is flourishing,” putting downward pressure on WTI prices, “pipelines are being built, reversed and expanded to accommodate the growth of local, abundant crude supply,” capping the spread, Ed Morse, Citigroup’s global head of commodity research in New York, said in a report on April 12.
U.S. crude production climbed to 7.33 million barrels a day in the week ended April 19, the highest level since April 1992, the Energy Department reported on April 24. Output has expanded 20 percent in the past year as a combination of horizontal drilling and hydraulic fracturing, or fracking, unlocks supplies from shale formations in North Dakota, Oklahoma and Texas.
Oil’s so-called forward curve, formed by prices for successive monthly futures over the next decade, suggests the Brent-WTI spread may remain closer to Goldman’s estimate in the third quarter than to Bank of America’s. Brent contracts averaged over the third quarter are trading at a premium of $7.88 a barrel to the equivalent three-month average for WTI.
“It’s what makes a market,” Marshall Berol, co-portfolio manager of the Encompass Fund in San Francisco, which has about $250 million in assets, said in a telephone interview. “You get some people on one side of a question and others on the other side. It’s a huge market, and a lot of people are playing in it with big bucks.”
Andurand Capital Management LLP, a hedge fund with $200 million of assets run by Pierre Andurand, returned 16 percent in February and March after correctly betting that the spread between Brent and WTI would narrow, two people with direct knowledge who declined to be identified said in early April.
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