According to the US Energy Information Administration (EIA), market fundamentals influencing the US and global oil markets have diverged this summer.
The EIA explains that record high seasonal refinery runs and low inventories in the US have put upward pressure on prices of US domestic crudes West Texas Intermediate (WTI) and Light Louisiana Sweet (LLS). Meanwhile, low demand in Europe and Asia and unplaced West African crude oil cargoes have depressed North Sea Brent prices.
Resulting from this, the Brent-WTI spread has narrowed, with WTO prices briefly reaching a premium to Brent prices for the first time since August 2010. WTI prices quickly returned to a discount to Brent, however the Brent-WTI spread remains relatively narrow, with the July spread averaging US$ 3.92/bbl, the lowest level this year and almost 50% below the 2014 average.
The EIA holds that high refinery demand and low inventories are putting upward pressure on US crude prices, with WTI in steep backwardation (with near term prices higher than longer term prices) over the front months of the futures curve. Backwardation in WTI reached very high levels as the August contract reached expiration, with the 1st-2nd spread closing at US$ 2.03/bbl on 22 July, only the second time in more than 10 years that the spread has closed above US$ 2/bbl.
US refineries maintained high utilisation rates over the summer, with refinery runs reaching 16.8 million bpd for the week ending 11 July, a record high. Runs remained at the record level for most of July. Access to cost advantaged crude, along with increasing domestic and export product demand, have kept US refinery margins strong, encouraging high runs.
High refinery runs and expanded pipeline takeaway capacity have pulled crude from inventory. Year to date, crude oil stocks at the Cushing, Oklahoma, crude oil trading hub have fallen 22.7 million bbls (56%). Cushing stocks had increased significantly during 2012 as growing US crude oil production in the Mid-Continent exceeded the capacity of infrastructure to move production out of the region. According to the EIA, current stocks are now below the pre-2012 buildup levels, falling to the lowest absolute level since 2008 and the lowest level for this time of year since 2004.
In contrast to the robust US market, weak petroleum demand and high inventories in Europe are weighing on Brent prices. Reduced European refinery crude runs combined with lower US imports of African light sweet crude have increased crude supply in the European/Mediterranean market, and as a result, Brent crude oil prices have declined.
In addition, refinery maintenance in Asia has limited the flow of Brent and African crude oil barrels eastward. Trade press has reported numerous cargoes of light sweet crude oil, especially West African barrels, without barrels late into their contract periods, putting additional downward pressure on Brent prices.
Over the past few days, global crude oil prices have declined because of ample supply compared with demand, with US crude prices falling more than Brent. As a result, the Brent-WTI spread has widened, reaching US$ 6.79 on 6 August.
Adapted from a press release by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/07082014/wti-and-brent-prices-converge-1088/