The recent narrowing in the Brent premium to NYMEX crude, which fell to a 17-month low of $7.48/b on Thursday, is set to continue into the third quarter, with $5/b a possibility, before widening again early next year, Goldman Sachs analysts said in a note Friday.
"We maintain our view that WTI-Brent spreads will narrow further and could drop as low as $5/bbl in 3Q13 as the Cushing bottleneck further eases and the opening of the Ho-Ho pipeline that connects the Houston crude market with the refineries in St James will allow the glut of light sweet crude that is developing in the Texas Gulf Coast to be distributed more evenly on the entire US Gulf Coast," the Goldman Sachs analysts said.
Among the factors the Goldman Sachs analysts cited as contributing to this ramp-up were a return to full capacity on the Ozerk pipeline (Cushing to Wood River) and the Tulsa East refinery following maintenance in the coming weeks, expected to add around 110,000-120,000 b/d of capacity.
"In addition, the Permian lines will continue to ramp up from around 200,000 b/d currently to over 400,000 b/d by late 3Q13," Goldman Sachs said.
They also noted that BP's 405,000 b/d Whiting refinery will be commissioned in the current quarter, with the entire modernization project on track to be completed in the third quarter, providing a further outlet for the Cushing barrels.
They warned, however, that under such conditions the US Gulf Coast would eventually become saturated with light sweet crude, forcing the price differential to push back out again.
"At this point the spread will likely have to start to widen again as refiners will need to be incentivized to blend synthetic medium crude and exports to Canada will have to increase in order to accommodate growing local production," the Goldman Sachs analysts said.
"This will likely require a larger discount of WTI to Brent as soon as early 2014."
