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Tight pockets, surplus pools

Sam Fletcher
OGJ Senior Writer 

The US oil market has become “a combination of pockets of tightness and pockets of surplus, with a series of contrasting regional and product quality distortions to boot,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

“While gasoline demand is at a record high for April, distillate demand is more than 15% below its April record. There is currently very little in the dynamics of the US oil market that is even or consistent,” he reported Apr. 28.

He noted a period of “very strong” oil prices in late April, with a whole series of new 18-month highs being set. On Apr. 26, the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes reached a new 18-month high in both dollar and euro terms. “Indeed, the OPEC basket has risen significantly faster in euro rather than dollar terms this year,” Horsnell said. “Last year there was a fairly common thread of analyst comment that said rising dollar prices were primarily due to dollar weakness, but this year’s very different price dynamics seem to have firmly refuted that idea.”

Also on Apr. 26, the length of the North Sea Brent futures price curve “all the way from the prompt month to 4 years out” reached a new 18-month high, as did all the traded months of the yen-denominated Tokyo Commodity Exchange’s Dubai-Oman average contract, he said.

Despite regional distortions and pressure at the front of the market, most of the West Texas Intermediate curve also reached a new 18-month high. “The section from the 3rd to the 16th contract did so on Apr. 26, and the section from the 17th to the 50th contract did so again on Apr. 27,” Horsnell said.

“The one piece that has not fit the general pattern has been the very front of the WTI curve, which has resulted in a string of prompt distortions. The weakness at the front of the WTI curve is due to the build-up of crude at WTI’s pricing point at Cushing, Okla.,” he said.

In the 5 weeks leading up to Horsnell’s report, US crude inventories increased 6.5 million bbl in absolute terms. US crude inventories usually rise from the end of December through to the beginning of May.


However, the average change in inventories for comparable 5-week periods over the past 5 years is an increase of 10.9 million bbl. So the increase of 6.5 million bbl in the latest 5 weeks remains short of the seasonal pattern. “In other words, the actual rise in US crude oil inventories of 6.5 million bbl means they have actually fallen relative to the seasonal pattern over the past 5 weeks, with the overall surplus of inventory above the 5-year average falling from 21.9 million bbl to 17.5 million bbl over that period,” he said.

Midwest surplus
Horsnell sees “no unusual supply imbalance at the margin” of the crude market. Instead, there has been “a lower-than-normal seasonal stock-build and a whittling away of the existing overhang of crude oil inventories.” By separating the Midwest “as if it were another country within the US data,” some striking differences emerge. “Midwest crude inventories have risen by 6.9 million bbl more than is seasonally normal, and those in the rest of the US have fallen by an enormous 11.3 million bbl relative to the normal seasonal pattern, Horsnell said. “While crude inventories are now 18 million bbl higher than their 5-year average in the Midwest, they are 500,000 bbl lower than the 5-year average in the rest of the US.”

The US crude market is still tightening at a steady rate, but all of the overhang is now concentrated in the Midwest. “All of the surplus crude is now in the one area that constitutes the locus for the pricing of WTI. The imbalance has in turn deepened the contango and, thus, further increased the incentive to move oil into the Midwest and to get it into Cushing storage in particular,” said Horsnell.

However, he cautioned analysts “not to draw more general conclusions on the basis on prompt WTI dynamics alone.” He said, “The Midwest flows should sort themselves relatively quickly out through some normalization of flows from Canada, higher regional [refinery] runs, some pipeline start-ups requiring line-fill, and because of a higher bid from the rest of the country now that inventories are lower than usual in other US regions. Until all that comes through, however, prompt WTI is likely to remain distorted.”

(Online May 3, 2010; author’s e-mail: samf@ogjonline.com)


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