U.S. crude to regain Brent premium, briefly, on storage bid

Wed Jan 14, 2015 12:03am EST
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By Catherine Ngai

NEW YORK (Reuters) - For only the third time since 2010, U.S. benchmark West Texas Intermediate crude traded at a premium to global marker Brent on Monday, restoring for a few brief moments what was once the normal hierarchy of the world oil market.

While the premium lasted less than five minutes before U.S. futures CLc1 closed at a 70-cent discount, a growing number of oil traders say WTI could ride high for days if not weeks in the near future, the latest surprising twist in a closely watched spread that has flummoxed the market for the past five years.

The reason they cite for the inversion in the so-called Brent/WTI spread CL-LCO1=R: the lucrative but temporary appeal of buying U.S. crude for storage in Oklahoma oil tanks.

As OPEC chooses to maintain output, an expanding surplus of crude has hammered global markets, driving both WTI and Brent down by some 60 percent since June and putting near-term oil prices at a $9-a-barrel or more discount versus those in a year's time - a structure known as "contango" that makes it advantageous to buy crude now and store it for later sales.

But for traders in the main European markets, that means chartering supertankers to use as floating storage at a cost of $1 a barrel or more per month, traders say. A dozen or so have already been fixed, Reuters has reported.

By contrast, physical crude storage at Cushing, Oklahoma, the delivery point for U.S. futures, is far less expensive than offshore storage - as little as 40 to 60 cents a barrel per month. That demand for storage has lent a measure of support to the collapsing market, moreso than for North Sea Brent.

"The cost to store the next barrel at Cushing is small compared to the cost to store the next barrel of Brent," said Amrita Sen, chief oil analyst at Energy Aspects in London. "We thought that (the spread) was going to narrow, but it’s happened earlier than we expected.”

To be sure, several other important factors are also helping unwind a discount that has persisted since the onset of the shale oil revolution, when expanding output of domestic light, sweet crude became bottlenecked inside the United States, caused WTI to fall to a discount of more than $25 versus Brent.   Continued...

A ship passes a petro-industrial complex in Kawasaki near Tokyo December 18, 2014. Brent crude held steady above $61 a barrel on Thursday, bringing a sharp drop in prices to a temporary halt as companies are forced to cut upstream investments around the world. REUTERS/Thomas Peter (JAPAN - Tags: BUSINESS ENERGY MARITIME)