Ample supplies of crude oil in the US and a large influx of North Sea crude to Asia has widened the Brent/WTI spread as geopolitical tensions increase price volatility.
The Brent/WTI spread was around $15.60/barrel in afternoon US trade Thursday, widening from $7.93/b on December 27, 2011 -- the front-month spread's lowest level in 11 months. It still remains off of a record high of $27.88/b reached on October 14, 2011.
Brent's recent rise in premium to WTI comes on the heels of a large increase in arbitrage opportunities between Europe and Asia over the last two months, where at least six very large crude carries of North Sea crude, totalling around 12 million barrels, have been sent to Asia for the for first time in at least three years.
The unusual movement of crude to Asia has been prompted by increased tension between Iran and the West, including a European Union embargo on Iranian oil imports that is poised to go into effect on July 1.
"Since the Iran sanctions ... Asian buyers are looking for alternate supply since they may not be able to get Iranian crude," Tom Bentz, broker at BNP Paribas, said Thursday. "On the WTI side, there is too much supply coming into Cushing and more carry in the cash market as we've seen a drop in refining capacity, which means less demand for crude."
US Energy Information Administration data released Wednesday showed that US total product demand fell to its lowest level in 13 years at 17.653 million b/d last week, driven by a 131,000 b/d drop in US gasoline demand to 7.967 million b/d -- its weakest level since just after the September 11, 2001 terror attacks.
US crude stocks rose more than 4 million barrels during that time due to softening demand as refiners also dropped utilization rates to a 9-month low of 81.8% of capacity.
At the NYMEX hub at Cushing, Oklahoma, crude stocks were up 1.476 million barrels to 30.123 million barrels last week, EIA data showed, moving some 1.542 million barrels above the five-year average.
CUSHING BOTTLENECK REMAINS
Harry Tchilinguirian, analyst at BNP Paribas, noted back-to-back increases in Cushing crude over the last several weeks amid a delay in the de-bottlenecking there.
"The much heralded reversal of the Seaway pipeline that would deliver crude oil from Cushing to the US Gulf Coast at an initial rate of 150,000 b/d is now only expected to begin shipments in June," Tchilinguirian said.
"Equally, the 190,000 b/d Spearhead Pipeline delivering crude from Flanagan, Illinois, to Cushing, after months of under-utilisation, will operate at full capacity in February," he said in a note.
Against anticipated lower Midwest runs, additional crude oil will move into storage, supporting a deeper contango in front-month WTI, he said.
The WTI forward curve is expected to extend its contango stretch to February 2013 from a previous June 2012 timeframe seen four weeks ago.
Analysts at JP Morgan said flows are expected to increase this year, with US and Canadian production seen growing by 540,000 b/d year-over-year in 2012, and by 600,000 b/d year-over-year in the second quarter.
"Contributing to the shift has been the dramatic fall in Midcontinent product margins that has reduced demand for crude leaving incremental volumes to move to Cushing," the analysts said. "These product imbalances are likely to be seasonal, but the combination of current weak cracks and pending maintenance is likely to fill Cushing for several months."
In the short-term, Michael Guido, director of hedge fund sales at Macquarie, told Platts the Brent/WTI spread could widen further as Brent remains the "lesser of two evils" as "event-risk" props up prices on concerns of supply disruptions from Iran and Nigeria.
"In the short-term the ample supply in the US will outperform WTI to the downside," Guido said.
Since the start of 2012, the Brent/WTI spread has settled between $8/b-$13/b, moving steadily higher due, in part, to an annual index re-balancing, which began January 9, and slowly widening the spread as Brent was introduced into the DJ-UBS index, analysts said.
The re-balancing of the index, which lasted five days, resulted in over 90,000 lots of WTI being sold, while some 55,000 lots of Brent were bought, noted analysts at Barclays Capital, likely affecting time-spreads and the Brent/WTI spread in day-to-day trading.
"The decision to shift a third of all crude oil contracts held by DJ-UBS from WTI to Brent, plus changes in weights to the S&P GSCI, will result in about $6.1 billion of inflows into Brent, and about $11.6 billion of outflows in WTI," analysts at Commerzbank had said in a note.
As for US crude supplies, Bentz of BNP, said as significant volumes are not likely to be moved out of Cushing for at least a year.
"We will not likely see relief at Cushing soon," he said. "Everyone got excited that the spread came in [in late December) as Libya came back online, but the pressure on the spread is now resuming."
