OGJ Senior Writer
On Jan. 12, the benchmark February crude contract increased 0.8% to a 2-year high of $91.86/bbl on the New York Mercantile Exchange, while in London, North Sea Brent crude came within $2 of $100/bbl oil, which hadn’t been seen since October 2008.
Brent gained 51¢ to $98.12/bbl then, but 2 days later it finished the week at $98.68/bbl—“the highest level since September 2008,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. However, West Texas Intermediate closed at $91.54/bbl Jan. 14.
Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC in Surrey, UK, noted the US benchmark WTI recently has trailed Brent as much as $8/bbl despite WTI “historically having commanded a premium to its transatlantic counterpart.”
At that time, the cash market remained at a discount to February futures, indicating it was not a physical squeeze driving the market. “Rather, fund flows into Brent as a result of commodity index re-weightings and a tightening of the market overall appears to be behind the surge,” KBC analysts reported Jan. 17. “High open interest on futures ahead of [February Brent] expiry led to fears…the emergent backwardation would balloon as traders sought to close out and roll forward their positions. The February-March futures spread widened to 85-90¢/bbl in favor of the prompt month ahead of the expiry, and currently stands at $1/bbl,” they said.
Earlier, Zhang said, “Strength in front-month Brent is partly due to backwardation between the first two contract months.” On Jan. 13, February Brent closed 77¢/bbl higher than the March contract, which was more widely traded as the February contract was scheduled to roll.
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “We were expecting the Brent premium vs. WTI to increase in the first days of 2011 on the back of funds shifting some of the WTI exposure to Brent for the difference in roll economics and on the back of the Standard & Poor’s Goldman Sachs Commodity Index [a composite of commodity sector returns] increasing its crude weights in Brent and lowering them in WTI.”
WTI should remain at a discount to Brent due to “changes in the supply infrastructure of the US Midwest (increased pipeline capacity from Canada and increased supplies from North Dakota),” Jakob said. Since most of the shift of funds should be complete, “…we are not convinced that the extreme front premium of Brent to WTI (March or April) can be sustained.”
Basically, Jakob said, “We have had in 2010 and also in 2009 occurrences where Brent was at an extreme premium to WTI, but that was linked to a ‘super contango’ in WTI where the extreme contango of WTI was the cause of the prompt weakness of WTI vs. Brent.”
At the time, he said, “While WTI is in a contango, it is not in a ‘super contango,’ and while Brent is in backwardation, it also is not yet in a ‘super backwardation.’ The February-March Brent backwardation is pretty steep in the final day of the contract, but end of contract volatility in that cash contract is usual, while the Brent March-April backwardation is only in single digits and April-May in Brent is in a small contango.”
Jakob said, “While we see on a time-spread difference a justification for WTI to trade at a discount to Brent, we do not see…justification for March or April WTI to trade at a $6/bbl discount to Brent.” He acknowledged the rationale for an extreme discount of WTI to Brent during shifts of position. “But we will now discount that input as most of the funds must have now done their rebalancing,” he said. He added, “Given we are not convinced about the sustainability of the front WTI discount to Brent, we are also not convinced about the sustainability of the WTI discount to…gasoline.”
(Online Jan. 17, 2011; author’s e-mail: email@example.com)