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WTI and Brent to trade near parity in 2015

Hydrocarbon Engineering,

According to Business Monitor International (BMI), as of 15 January, front month West Texas Intermediate (ETI) was trading at US$0.32/bbl premium to Brent; a marked contrast to the same period last year, when WTI was priced at a steep discount of –US$14.53/bbl. BMI forecasts the two grades to trade near parity throughout 2015, with transatlantic arbitrage opportunities capping any widening of the spread.

The main factor behind the narrowing spread in 2014 was the development of US pipeline infrastructure. The easier flow of crude from key production to refining centres reduced refinery reliance on imported Brent-linked grades and increased demand for domestic output. As infrastructural debottlenecking continues in 2015, US import volumes will increasingly be determined by WTI-Brent arbitrage and less by logistical constraints.

In general, the US oil market is becoming more integrated with global oil markets, as the government continues to loosen restrictions surrounding the crude oil export ban. Easing regulations on condensates exports and crude oil swaps with Mexico could see export volumes rise by more than 1 million bpd in 2015, with greater market integration helping to drive a higher correlation between US and international prices.

BMI holds that high US refinery runs and substantial spare storage capacity (133.1 million bbl) should mitigate the glut of WTI in the first half of 2015. Storage arbitrage opportunities for Brent are more limited, and the grade is more heavily exposed to the Asia-Pacific markets, where aggressive competition from Middle Eastern producers is driving down prices.

While this could see WTI sporadically shift to a premium over Brent, growth in the spread will remain limited. For instance, as a result of the January WTI premium BMI expects to see higher US imports of Brent linked grades, loosening the domestic market and weighing down the price of WTI.

The second half of 2015 could provide more spread volatility, as the relative looseness in the market for Brent and WTI will rest heavily on the price elasticity of US demand, the pace of the slowdown in US shale production growth and the speed of its inventory drawdown. However, even in the event of a more gradual slowdown in US crude oil production than is currently forecast (6.0% in 2015, as compared to 14,.5% in 2014), BMI does not see WTI returning to the sharp discounts of 2014. Higher export capacity and the increased ability to back out imports will act as a floor on the spread.

Adapted from a report by Emma McAleavey.

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