Goldman Sachs said earlier this week it had closed its Brent/WTI spread trade recommendation after the ICE Brent premium to NYMEX crude fell below its target of $5/b, adding short-term scope for further narrowing remained, but pipeline and refinery economics are expected to see the spread push back out again.
At 1700 GMT Tuesday, the August ICE Brent contract traded at a $4.64/b premium to August NYMEX crude, having earlier narrowed to $4.53/b, the lowest level since January 18, 2011.
The spread had traded as wide as $28.07/b on October 14, 2011, and $23.44/b as recently as February 8 this year.
"It is important to note that while the narrowing of the spread likely happened in anticipation of the turn in the Cushing balance, inventories are still near record highs, as continued refinery turnarounds and weaker pipeline flows owing to both planned maintenance and repair works have held back a more meaningful decline in Cushing inventories since May," Goldman Sachs said in their Energy Weekly newsletter.
"This is now coming to an end with the return of the Tulsa East refinery, the start of the new 250,000 b/d sour CDU at Whiting, the Ozark pipeline returning from maintenance, the start of the Permian Express pipeline and the ramp up of the Longhorn pipeline, which are all due late June or early July," it said.
As a consequence, the Goldman Sachs analysts said they expect a sharp draw down in Cushing inventories in the coming months that, provided the US Gulf Coast does not become oversupplied with light crude oil, could result in an narrower spread.
"However, we would expect this to be short-lived as without a positive arb to the USGC, spot pipeline flows would adjust quickly," Goldman Sachs said, noting the costs to ship crude via pipelines suggested the current spread was near pipeline economics.
"Therefore, while the risks in the near term are clearly to the upside (narrower WTI-Brent spread), we believe the risk/return trade-off becomes less attractive going forward," Goldman Sachs said.
With this in mind, then, they added they had closed its long September 2013 NYMEX WTI versus short September 2013 Brent crude oil recommendation initiated on August 21 last year.
"Over the medium term, we expect the WTI-Brent differential to widen again as the USGC becomes increasingly saturated in light sweet crude oil," Goldman Sachs said. "A wider differential will then likely be required to incentivize refiners to run lighter barrels at the expense of medium grades starting in late 2013 or in 1H2014."
