WTI Discount to Brent Reflects Logistics Constraints

Crude stocks at Cushing hit a low of 56 million barrels on July 28 but have since risen by almost 7 million barrels, according to the U.S. Energy Information Administration (EIA).

In the rest of country, commercial crude stocks stood at 426 million barrels on July 28 but have since fallen by almost 24 million (“Weekly Petroleum Status Report”, EIA, Oct. 4).

Stocks on the U.S. Gulf Coast, which includes the major refining centres, have declined by 13 million barrels over the same period. Stocks on the East and West Coasts have each fallen by 4 million barrels.

Crude stocks on the East, West and Gulf Coasts, where refineries are mostly supplied by sea, have all fallen in line with the tightening of the global oil market.

But the landlocked Midwest, which is mostly supplied by domestic shale producers as well as pipelines from Canada, has behaved differently.

 

Mind the Gap
The diverging regional trend in crude stocks since late July has coincided with the emergence of a big discount in WTI futures prices compared with Brent.

The discount for front-month WTI futures compared with Brent, which had been stable at about $2-$3 a barrel between April and July, began to increase sharply from the end of July and is now almost $6.

While Brent futures have moved into backwardation, indicating a tightening market, WTI prices began to diverge from late July and have remained in contango.

Harold Hamm, chief executive of Continental Resources (CLR) , one of the largest U.S. shale producers, has blamed forecasts produced by the EIA for the widening discount on WTI.

Hamm blames the agency for being overoptimistic about domestic oil production and causing a distortion in WTI prices (“Continental CEO says EIA forecast caps WTI”, Argus, Sept. 27).

Hamm has suggested that WTI and Brent prices should be within “a dollar or two”.

But the stocks build-up at Cushing, and to a lesser extent in the rest of the Midwest, is real and a more likely explanation for the disconnect between WTI and Brent.

Spot prices and calendar spreads point to local oversupply in the Midwest and specifically around Cushing while the rest of the global market is tightening.

The price disconnect has proved surprisingly long-lived, despite a surge in crude exports from the U.S. Gulf Coast in recent weeks, which suggests logistical constraints are preventing the Midwest glut from clearing quickly.

The Brent-WTI gap is another example of the periodic disconnect between landlocked WTI and seaborne Brent, rather than the result of flawed forecasts.