Brent tops WTI as benchmark

Sam Fletcher
OGJ Senior Writer

As the international benchmark other crudes are priced against, “West Texas Intermediate is dead, long live North Sea Brent,” said analysts in the Houston office of Raymond James & Associates Inc. WTI’s recent disconnect with other crude prices in the global market “is here to stay—for awhile,” they predicted.

For some 50 years, WTI traded at the key Cushing, Okla., hub as proxy for global oil prices and at a slight premium above most other crudes because of its low sulfur content and its high API gravity. Occasionally, this normal trading pattern has been disrupted for brief periods, such as the 2007 refinery fire in Sunray, Tex., or the US oil demand collapse in 2009 that led to $4-5/bbl discounts on WTI. But those blips self-corrected within months.

During a temporary blowout in the WTI-Brent price spread in February 2009, Raymond James analysts said, “The main reason for the roughly $5/bbl WTI discount was that oil demand in the US took a steeper hit than in just about any other major economy. This was not surprising, given that the US was the epicenter of the global economic crisis.” However, they said, “Unfortunately for US oil producers, it appears this disconnect is more structural in nature than prior disconnects.”

US demand has recently rebound faster than either Europe or Japan, while the spread between WTI and other types of crude has blown out to unprecedented levels,” Raymond James analysts said, with Brent “at a huge $15.02/bbl premium” to WTI at the close of trading Feb. 11.

Infrastructure problems
“That tells us the current glut at Cushing is not a function of cyclical or temporary supply-demand interruptions, but rather a longer-lasting infrastructure problem,” Raymond James analysts said. “Specifically, an increasing amount of inbound oil from emerging horizontal plays in Canada, the Bakken, and Permian basin has outpaced the outbound pipeline capacity.”

Cushing storage has a major influence on WTI pricing due to pipeline bottlenecks that cause more oil to accumulate at the hub than can be shipped to the Gulf Coast. Earlier this month, Cushing inventories reached the highest level on record.

The outbound transportation bottlenecks will force WTI to trade at a discount to other crudes though 2011 and into 2012. “That means WTI will become much less relevant than it has been historically. This is true for US oil producers [who] don't transport their oil to Cushing and even more so for companies with international operations,” the analysts said.

Raymond James analysts said, “It appears that the long-term solution to the glut—more outbound pipeline capacity at Cushing—will take at least 18 months to materialize. With this in mind, we have initiated our first-ever forecast for Brent, which we believe will be the principal benchmark for global oil prices for the foreseeable future. We are projecting a full-year 2011 Brent average of $97.50/bbl (vs. $90/bbl for WTI), followed by $104.50/bbl in 2012 (vs. $100/bbl for WTI). While the current record-setting WTI discount vs. Brent should narrow over time, we doubt that WTI will revert back to its traditional premium until 2013 at the earliest.”

The WTI contract for March closed at $85.58/bbl on Feb. 11 in the New York Mercantile Exchange, with a net loss of $3.45/bbl during that week, compared with a net gain of $1.60 to $101.43/bbl during the week for Brent as the two benchmarks continued to diverge, said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Meanwhile, he said, “Most of the rest of the world is already paying over $100/bbl for crude.” In addition to the higher price for Brent, Louisiana Light Sweet crude closed at $103.08/bbl, and Urals crude at $98.07/bbl. “In other words, global and US coastal oil (and oil product) prices are likely to be much higher than WTI for the next 18 months,” Zhang said.

(Online Feb. 14, 2011; author’s e-mail: samf@ogjonline.com)

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