Brent-WTI Spread Shrinks to $5 for First Time in 2 1/2 YearsRupert Rowling and Grant Smith
The difference between the world’s two most-traded crude oil grades shrank to less than $5 a barrel for the first time in about 2 1/2 years, underlining the easing of a supply bottleneck in the U.S.
North Sea Brent crude’s premium to West Texas Intermediate narrowed to as little as $4.77 a barrel today. It’s the first time the spread between the two grades has been at $5 or less since Jan. 18, 2011, on an intraday basis, according to data compiled by Bloomberg. WTI, the main U.S. crude grade, had been typically the more expensive grade until mid-2010.
The drop in the gap between Brent, a gauge for more than half the world’s oil, and WTI shows how improved pipeline networks and the use of rail links have helped to unlock a glut at America’s oil-storage hub at Cushing, Oklahoma, in line with a prediction made by Goldman Sachs Group Inc. as long ago as February 2012. WTI rose 5.2 percent in the first half of this year. Brent dropped by 8.1 percent as North Sea supplies have stabilized following oilfield maintenance.
“The spread is coming in on anticipation that we’re going to see pipelines get built and more rail capacity put in place,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “There is now a likelihood that not only will U.S. imports drop further, but that the country will be exporting before long.”
WTI for August delivery advanced $1.43, or 1.5 percent, to $97.99 a barrel on the New York Mercantile Exchange, the highest settlement since June 19.
Brent for August settlement increased 84 cents, or 0.8 percent, to end at $103 a barrel on the London-based ICE Futures Europe exchange. Brent’s premium over WTI closed at $5.01 after falling below the $5 level in intraday trading. That’s the lowest settlement since Jan. 4, 2011.
WTI futures open interest reached a record high of 1.87 million contracts on June 18. The number of total contracts outstanding has stayed above 1.8 million since June 10. Brent open interest reached a record high of 1.61 million on May 13.
Since the start of 2012, new and reversed pipelines have boosted capacity to Houston by almost 1.2 million barrels a day, with another 850,000 barrels a day coming online by the end of the year, according to data compiled by Bloomberg. The coming expansions include the Magellan Midstream Partners LP’s Longhorn pipeline, TransCanada Corp.’s southern leg of Keystone XL and Sunoco Logistics Partners LP’s Permian Express line.
“WTI is enjoying its return to market leadership,” Olivier Jakob, managing director at Petromatrix GmbH, an energy-research company in Zug, Switzerland, said in a June 25 report as the spread narrowed to less than $6.
The WTI-Brent spread widened to a record of $28.08 a barrel on Oct. 14, 2011. It was $19.29 at the end of last year and averaged $16.04 since the start of 2011 through June 28 this year.
“Even U.S. East Coast refineries, which historically have relied on Brent crude oil and Brent-like crudes, can now access U.S. light sweet crude oil,” the U.S. Energy Information Administration, a unit of the Energy Department, said in a report on June 28. “U.S. crude that moves by rail is replacing Brent crude oil and Brent-like crude oil imports into the U.S. East Coast, putting downward pressure on the price of Brent crude oil and narrowing the differential versus WTI crude oil.”
Goldman Sachs was for many months all but alone in predicting that the spread, one of the most-traded price relationships in energy markets, would decrease.
The bank reiterated its stance in subsequent reports, even as the differential widened to as much as $26 on Nov. 15. Goldman said on May 10, that it expected the premium to drop to $5 a barrel in the third quarter.
North Sea crude production in July is set to rise to 1.94 million barrels a day, the most since April and 3.1 percent higher than a year earlier, as the main maintenance period for the region’s oil fields ended, according to loading program data compiled by Bloomberg.