October 18, 2013 / 6:00 PM / in 4 years

US oil spreads to recover on Keystone line fill - Goldman

NEW YORK, Oct 18 (Reuters) - The opening of a TransCanada Keystone pipeline segment should again enrich the premiums of the front-month U.S. crude oil contract to deferred months as the segment will move ballooning supplies of crude from shale plays to Gulf Coast refineries, Goldman Sachs said in a note on Friday.

November futures moved discount to December last week as oil supplies rose at Cushing, Oklahoma, the delivery point for the U.S. oil futures contract, reversing a months-long decline.

That so-called “contango” in the spread, when the first month’s price is lower than deferred months, took hold for the first time since June.

Traders who had bet on increasing draws from Cushing, which reached fever pitch during peak summer demand, got caught on the wrong side of market as refineries went into maintenance, lessening demand for oil and causing a larger-than-expected increase in supplies.

As refiners finish the maintenance period, TransCanada will be filling its 400,000 barrel-per-day MarketLink pipeline between Cushing, Oklahoma, and Port Arthur, Texas, Goldman said.

The “line fill for MarketLink in early November can more than deal with the increased Bakken production being railed into Cushing,” the note said. The end result is front-month crude prices will rise ahead of deferred months, known as “backwardation” reflecting that refiners will have access to and use the light, sweet Cushing oil.

“As a result, we continue to expect the WTI-Brent spread to narrow to -$5.00/bbl towards year end and expect a recovery in WTI timespreads,” the Goldman analysts said.

The contango scenario may be a bit more drawn out, albeit mildly, other analysts say, as refiner demand for light, sweet crude is uncertain. For one thing, the market is waiting on BP’s Whiting, Indiana, refinery to fire up its coking plant.

“Looking ahead, some significant refiner demand for light crude oil from Cushing, like that from the BP Whiting refinery, will fade in favor of heavier Canadian crude when their coker comes on line,” said Harry Tchilinguirian, head of commodity market strategy at BNP Paribas in London.

Considering the risk of potential supply disruptions to global benchmark Brent, “the corollary is that WTI/Brent discount should widen.”

Brent’s premium to U.S. oil has fluctuated in the last year, from $23 in February to flat in July. The spread was last trading at $8.47 per barrel.

“We are more inclined to take the point of view that it can achieve double digits again,” Tchilinguirian said.

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