Sam Fletcher
OGJ Senior Writer
The unusual persistent price dislocation between West Texas Intermediate and other benchmark crudes is affecting returns to commodity investors, said analysts at Barclays Capital in London. The September contract for WTI climbed to $97.60/bbl July 15 on the New York Mercantile Exchange, while in London, the September front-month IPE contract for North Sea Brent gained $1 to $117.26/bbl.
As a result, Barclays analysts reported Standard & Poor’s Goldman Sachs Commodity Index (GSCI) returns since early 2010 (10%) were only at half the level they would have been if the usual relationship between WTI and North Sea Brent remained in place. “The Dow Jones-UBS Commodity Index returns at 15% are a quarter less,” they said.
Because most index investors have little leeway in their requirement to track a particular commodity investment benchmark, Barclays analysts said, “very few have been able to shift their exposure out of WTI and into other crudes, such as Brent, which at present are much better benchmarks of global oil market fundamentals.” They said, “We estimate that the resulting lost income represents an opportunity cost to commodity index investors totaling almost $25 billion over the 6 quarters.”
They said, “A combination of inflexible pipeline systems, a lack of capacity for shipping crude out of the US Midwest, and a surge in deliveries of both Canadian and US domestic crude from new shale plays means that the WTI dislocation is likely to persist for some time and could get much worse. The situation may also be exacerbated further by the need to reposition should the leading index providers decide to increase weightings in Brent at the expense of WTI.”
The best way for index investors to position for potential worsening of crude oversupply in the US Midwest—especially in Cushing, Okla., early in 2012—is by selling WTI time spreads. Barclays analysts said, “In the past when Cushing inventories have filled, prompt WTI spreads have blown out to above $9, but monthly time spreads for early 2012 are currently trading at 30-40¢. Given the potential oversupply in Cushing early next year, current values represent an attractive entry point for such a strategy, in our view.”
Prices, supplies both rising
Analysts at the Centre for Global Energy Studies (CGES), London, said, “Oil supplies are rising, but markets remain tight and prices have returned to the levels they occupied before the Organization of Petroleum Exporting Countries and the International Energy Agency successively stunned markets in June. Although the macroeconomic outlook for the developed economies of the Organization for Economic Cooperation and Development remains far from rosy, the developing Asian and Middle Eastern economies are continuing to grow strongly and a combination of regulated end-user prices and both government and commercial stock-building are helping to maintain their thirst for crude.”
They said preliminary June production estimates showed Saudi Arabia, Kuwait, the UAE, and Qatar raised their collective output by more than 650,000 b/d from the previous month’s level. The IEA initiated the release of up to 60 million bbl of strategic stocks, with the US selling 30 million bbl of light, sweet crude from its Strategic Petroleum Reserve. However, CGES analysts noted WTI could not be exported to Europe to relieve the loss of Libyan output.”
Much of the stock release in Europe took the form of reduced product stock-holding obligations on refiners. “With such a surge in supplies, it is pertinent to ask why oil prices, after dipping in the wake of the OPEC meeting and IEA announcement, are now back above the levels they occupied before either of these events. For a start, much of the incremental the Gulf Cooperation Council (GCC) countries’ production is likely to be needed to meet local demand, which is rising seasonally as temperatures soar.” CGES analysts said. “That which is exported will take many weeks to arrive at the world’s main oil-consuming centers—one of the reasons IEA felt it necessary to act in the first place.”
(Online July 18, 2011; author’s e-mail: [email protected])
