MARKET WATCH: WTI-Brent spread narrows sharply
The front-month US benchmark crude contract made only a minimal gain July 19 but finished last week at a 16-month high above $108/bbl. The biggest attention-grabber, however, was West Texas Intermediate trading near parity with North Sea Brent for the first time since 2010, down to only a 2¢/bbl spread. By early trading July 22, WTI was at a premium to Brent.
In Houston, analysts at Raymond James & Associates Inc. said the rally in WTI prices will be harder to sustain than the economic recovery of Detroit, which filed for Chapter 9 bankruptcy protection July 18 because of its ballooning debt, now nearing $19 billion. It is the largest municipal bankruptcy filing in US history.
Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “A large part of the narrowing of this spread…is attributable to WTI strength, premised on growing US demand optimism and strong drawdowns of US crude oil inventory levels (especially Cushing, Okla., inventories). Both benchmarks continue to be supported by geopolitical concerns centered on Egypt and the possibility (still remote in our view) of a global oil traffic disruption via the Suez Canal or the SUMED [Arab Petroleum Pipelines Co.] pipeline.”
WTI’s strong showing against Brent seems “in direct contrast to the fundamental picture of the US crude market,” said Raymond James analysts. “The reality appears to be that even a structurally oversupplied US oil market can be caught short, and we believe that's exactly what is happening this summer.”
The Gulf Coast crude market “has effectively disconnected from the global light-sweet benchmarks…in that Louisiana Light Sweet (LLS) prices are trading at a whopping $5/bbl premium to Brent,” they said. “In our view, this simply doesn't make economic sense given the ability of Gulf Coast refiners to shift their crude slate to the most economic barrel, wherever in the world that may be. Thus, we fully expect this premium to dissipate over time (probably weeks, not months) as the Gulf Coast market comes into better balance.”
Looking ahead to 2014, Raymond James analysts said, “As long as Washington continues to limit crude exports, we believe that oil-on-oil competition will begin to drive US oil prices lower—first in the Gulf Coast (LLS), but eventually throughout the US as WTI becomes ‘stranded’ as well.”
Ground said, “Regardless of the relative moves, we maintain that aside from the geopolitical premium (which cannot be sustained indefinitely in the absence of real threats to global oil supply or traffic), the fundamental supply-demand pictures point to a global oil price of $105/bbl.”
In the equity market, Raymond James analysts reported, “The positivity in stocks from recent weeks continued, albeit more subdued, with the Standard & Poor’s 500 Index and the Dow Jones Industrial Average both up 0.4% on the week.” The SIG Oil Exploration & Production Index recorded a gain of 3% last week, while the Oil Service Index performed in line with the broader market, up 0.6%.
Energy prices
The August contract for benchmark US light, sweet crudes ticked up 1¢ to $108.05/bbl Aug. 19 on the New York Mercantile Exchange. The September contract gained 6¢ to $107.87/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., followed the front-month futures contract up 1¢ to $108.05/bbl.
Heating oil for August delivery decreased 1.13¢ to $3.09/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, rose 1.36¢ to $3.12/gal.
The August natural gas contract dropped 2.3¢ to $3.79/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 7.1¢, also closing at a rounded $3.79/MMbtu.
In London, the September IPE contract for North Sea Brent lost 63¢ to $108.07/bbl. Gas oil for August fell $3 to $925.75/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 29¢ to $106.40/bbl. So far this year OPEC’s basket price has averaged $104.97/bbl.
Contact Sam Fletcher at [email protected].
Sam Fletcher | Senior Writer
I'm third-generation blue-collar oil field worker, born in the great East Texas Field and completed high school in the Permian Basin of West Texas where I spent a couple of summers hustling jugs and loading shot holes on seismic crews. My family was oil field trash back when it was an insult instead of a brag on a bumper sticker. I enlisted in the US Army in 1961-1964 looking for a way out of a life of stoop-labor in the oil patch. I didn't succeed then, but a few years later when they passed a new GI Bill for Vietnam veterans, they backdated it to cover my period of enlistment and finally gave me the means to attend college. I'd wanted a career in journalism since my junior year in high school when I was editor of the school newspaper. I financed my college education with the GI bill, parttime work, and a few scholarships and earned a bachelor's degree and later a master's degree in mass communication at Texas Tech University. I worked some years on Texas daily newspapers and even taught journalism a couple of semesters at a junior college in San Antonio before joining the metropolitan Houston Post in 1973. In 1977 I became the energy reporter for the paper, primarily because I was the only writer who'd ever broke a sweat in sight of an oil rig. I covered the oil patch through its biggest boom in the 1970s, its worst depression in the 1980s, and its subsequent rise from the ashes as the industry reinvented itself yet again. When the Post folded in 1995, I made the switch to oil industry publications. At the start of the new century, I joined the Oil & Gas Journal, long the "Bible" of the oil industry. I've been writing about the oil and gas industry's successes and setbacks for a long time, and I've loved every minute of it.
