Disappearing Bakken oil discount adds to output slowdown signs

Wed Jun 10, 2015 12:29am EDT
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By Catherine Ngai

NEW YORK (Reuters) - Oil traders scrambling to secure crude in the U.S. Midwest have pushed North Dakota's Bakken to a near premium for the first time in two years, a rally stoked by record refinery runs and an unprecedented slump in Canadian imports.

Yet some traders say the surprising strength emerging from opaque physical crude markets in the heartland of the fracking boom also points to a more important, lasting factor: declining production of Bakken crude, a long-anticipated but as yet unproven twist in the shale revolution.

The buying frenzy pushed Bakken delivered at Clearbrook, Minnesota WTC-BAK, to trade just 35 cents a barrel below the West Texas Intermediate benchmark last week, dealers say, the narrowest discount since July 2013. On Tuesday, it widened slightly to a 75-cent discount. Four months ago, it traded at a $7.50 discount.

"The rapid spread contraction may be indicative of a faster-than-anticipated production decline, presenting upside risk to our price forecast" in the second half, Barclays analysts wrote in a report.

There are other compelling reasons for Bakken crude's relative strength, to be sure.

Canada's oil exports to the United States suffered their biggest monthly decline on record this spring due to maintenance on big oil sands projects as well as forest fires that slashed a tenth of Alberta's total oil production.

Refiners in the U.S. Midwest region ran the most crude ever for the month of May thanks to a light maintenance slate and robust margins, triggering a bidding war for light barrels.

Regardless, the disappearing discount offers a partial reprieve for large producers like Continental Resources (CLR.N: Quote) and Hess Corp (HES.N: Quote) after the past year slashed global oil prices by as much as 60 percent to six-year lows.   Continued...

A man works on the rig of an oil drilling pump site in McKenzie County outside of Williston, North Dakota March 12, 2013.  REUTERS/Shannon Stapleton