MARKET WATCH: WTI price falls, Brent's rises for record-high spread

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 14 -- Crude oil prices in the New York market continued to fall with the front-month futures contract down 2% on June 13, but the price for North Sea Brent held up despite an intraday sell-off, closing with a small gain that widened the spread between it and West Texas Intermediate to a record $21.80/bbl.

The front-month natural gas contract also fell 2% in New York on forecasts for milder weather and a rebound of offline nuclear generation, said analysts in the Houston office of Raymond James & Associates Inc. Signs of waning Chinese demand in May put downward pressure on crude prices, they said.

Meanwhile, Standard and Poor's downgraded the sovereign debt of Greece “to the world’s lowest level” and signaled the strong possibility of a default that would damage Europe’s economic recovery.

Brent-WTI spread
“Brent continues to trade at a higher a higher premium to WTI and in the process is creating its own island disconnecting from the rest of the world,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The common argument is that Brent is a better benchmark than WTI for the valuation of the world supply and demand. However, when Brent trades at a premium to [Light Louisiana Sweet (LLS) crude] and when West African premiums are sliding down, we fail to find the justification for the relative strength of Brent.”

Jakob warned, “If the pricing of the global supply picture is dependent on the hands holding a couple of Brent or Forties cargoes, then the Brent futures will enter their crisis of confidence the same way that WTI suffered a crisis of confidence following the super contangos of 2009.”

Further, he said, “The reformulated blend stock for oxygenate blending (RBOB) crack to Brent continues to slide down, but given that Brent is starting to disconnect from LLS, all the US hedgers and traders that have recently switched from trading the WTI cracks to the Brent cracks will start to find that even this crack is not predictable anymore. From the collapse of WTI in 2009 to the surge of Brent in 2011, global markets will continue to search for a crude oil benchmark that does not fall hostage to the economics of a micro market.”

He said, “Our opinion remains that Brent futures are largely overbought, but we currently have a low confidence in those futures link to the overall crude oil balances. In circumstances like today where the catalyst for the strength in Brent is hard to define, the lack of position transparency in Brent (no Commodity Futures Trading Commission position breakdown) is not helping.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted, “Despite the weakness on the flat price WTI, the term structure barely moved, which might suggest that the widening WTI-Brent spread has not necessarily been caused by concerns over Cushing, Okla., storage.” He reported Brent’s term structure strengthened on lower North Sea production and Royal Dutch Shell PLC’s declaration of force majeure on its June and July Bonny Light crude loading in Nigeria.

“Despite the headline bullishness, we believe only a very small number of cargoes of Bonny Light crude are likely to be affected. More importantly, the premiums of [water accommodated fraction] WAF crude over Brent have failed to strengthen on the back of the news,” Zhang said. On oil products, he said, heating oil was broadly unchanged, while RBOB gasoline weakened slightly.

On June 14, China raised its bank reserve ratio by 50 basis points “as inflation remained heated,” said Zhang. “China’s May CPI and Producer Price Index (PPI) came in at 5.5% year-over-year and 6.8% year-over-year, while industrial production remained strong, at 13.3% year-over-year. As our analysis reveals, Chinese monetary policy changes have limited impact on the oil market, at least in the short term,” he said.

Jakob observed, “The Chinese CPI is at the highest level since 2008, the food component is up 11.7%. We continue to expect another increase in rates from China.” He said, “Chinese crude oil refinery runs were flat in May vs. April and up 630,000 b/d vs. last year. This is in line with expectations.”

Zhang said, “Following last week’s Organization of Petroleum Exporting Countries meeting, the market is anticipating that Saudi Arabia will be push more crude to the market. As any incremental crude production from the Saudis is likely to be heavy sour grades, the benchmark for this type of crude, the Dubai contract, weakened further relative to Brent. Consequently, the Dubai-Brent spread has reached the level seen during 2008. However, there is abundant spare refining capacity today compared to 2008, particularly conversion and desulfurization capacities. It is likely the Dubai-Brent spread might have over-blown as refining margin for sour grades outperforms that for sweet crude.”

Energy prices
The July contract for benchmark US sweet, light crudes lost $1.99 to $97.30/bbl June 13 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing dropped the same amount to the same closing price.

Heating oil for July delivery dipped 0.07¢ to $3.11/gal on NYMEX. RBOB for the same month declined 2.09¢ to $3/gal.

The July contract for natural gas decreased 11.1¢ to $4.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., closed at $4.72/MMbtu on June 13, down from $4.92/MMbtu June 9, the last available previous closing price.

In London, the July IPE contract for North Sea Brent increased 32¢ to $119.10/bbl.

The average price for OPEC’s basket of 12 benchmark crudes was down 12¢ to $113.33/bbl. So far this year, OPEC’s basket price has averaged $106.66/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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