The big story in crude oil markets over the past few years was the historic price divergence between West Texas Intermediate (WTI) and Brent, the world’s 2 most-widely traded crude oil contracts. However, after blowing out to an unprecedented $27 per barrel Brent premium in summer 2011, the story is now about Brent-WTI contraction and where this price relationship is headed.
The Brent-WTI price spread narrowed to less than $5/bbl yesterday for the first time in over 2 years, as pipeline bottlenecks between the major storage center in Cushing, Oklahoma and the US Gulf Coast continue to ease. Investment bank Simmons & Company expects the price spread to narrow even further over the next 6 to 9 months, they said in a research note.
“With an additional 280 kb/d of Longhorn and Permian Express capacity starting in 3Q even more barrels will be rerouted away from Cushing toward the USGC later this year, potentially debottlenecking Cushing. 3Q Permian pipeline capacity additions including Permian Express (additional 90 kb/d), Longhorn Pipeline (additional 150 kb/d) and West Texas Gulf (WTG, additional 40 kb/d) will increase the barrels moving to the USGC while reducing the flow of Permian barrels currently moving by higher cost rail and barrels moving via Basin Pipeline or Centurion North to the lower priced Cushing market. We estimate that the fewer barrels moving to Cushing will effectively eliminate the Cushing bottleneck once the Permian pipelines are at full capacity (expected late 3Q/early 4Q). As a result, Cushing oil storage levels may decline rapidly in 4Q.” – Simmons & Company
A recent Citi note reported similar findings over the short term, but the bank’s analysts expect the Brent-WTI price spread to again widen toward the $10/bbl range by around 2015.
“Citi thus sees Brent-WTI at $9 in 2Q, $6 in 3Q and $4 in 4Q’13, but then widening through 2014 as the USGC [US Gulf Coast] becomes increasingly glutted; combined with some increase in inflows to Cushing, the spread could target $7-9 by 2015, assuming no pipeline delays or disruptions; however, insufficient inflow additions to Cushing would mean the spread staying at $4-6. More exportability could narrow Brent-LLS.”
As they say, the only sure thing about oil price forecasts is they will be wrong, so stay tuned.
