MARKET WATCH: Market events narrow Brent-WTI spread

The price of Brent crude fell Apr. 16 with apparent progress in negotiations between Iran and the United Nations Security Council. But West Texas Intermediate increased slightly in both the futures and spot markets on news Seaway pipeline will start shipping oil on May 17 from Cushing, Okla., to the US Gulf Coast, 2 weeks sooner than expected.

The earlier Seaway start-up “in itself is not a huge deal, but it now forces the market-at-large to focus more on the future economics of the Brent-WTI spread,” said Olivier Jakob at Petromatrix in Zug, Switzerland.

“In addition, the tariff Seaway is charging the customers is in the range of $3-5/bbl, which takes away the market’s fear that Seaway might charge a rate commensurate with the very wide WTI-Brent spread,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products were also lower on the day, following Brent. We continue to put our emphasis on the price activity in Brent time spreads, which have been falling sharply since the beginning of this month.”

Jakob said, “On average, the Seaway tariff for Cushing to the US Gulf is at $3.28/bbl for light crude oil and $3.78/bbl for heavy crude oil, hence there is plenty more room for a further correction in the Brent premium to WTI.”

He said, “It was clearly Seaway more than ‘Iranium’ that drove Brent prices yesterday.” Jakob noted, “There will be a second round of Seaway towards the end of the year (increased capacity) but also because of increased production of light crude from Texas.” Meanwhile, there remains a strong possibility of release of oil from strategic petroleum reserves because of presidential races in the US and France.

Reduction of the Brent-WTI spread should help support Atlantic Basin refinery margins that “for now are at attractive levels,” Jakob said. “The refining margins in the Mediterranean are at the best levels of the year, and the same applies to the US East Coast refining margins.”

Some of that increase resulted from units being shut in for maintenance. “But given that the flat price is still capping end-user demand, we are not confident that at current prices there will be enough demand to absorb the additional product output that is being priced in the cracks, and we will therefore have a cautious to the products backwardation in the months to come,” said Jakob.

In other news, Zhang said, “US consumers provided some support yesterday with the US retail sales number beating expectation, which is rather extraordinary in the context of very high gasoline prices. This morning, the German ZEW survey also showed that confidence is growing, which should alleviate some of the fears of another round of the Euro-zone debt crisis as Spanish and Italian bonds tumble. It is likely that the economy will hit a bit of soft patch during the second and third quarters as we’ve seen during the past 2 years. Then again, policymakers will stand ready to prop the market up, resulting in the market swinging inside a rather wide range.”

Energy prices

The May contract for benchmark US sweet, light crudes rose 10¢ to $102.93/bbl Apr. 16 on the New York Mercantile Exchange. The June contract gained 5¢ to $103.37/bbl. On the US spot market, WTI at Cushing was up 10¢ to $102.93/bbl.

Heating oil for May delivery, however, dropped 5.8¢ to $3.12/gal on NYMEX. Reformulated stock for oxygenate blending for the same month fell 7.91¢ to $3.27/gal.

The May natural gas contract increased 3.5¢ to $2.02/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.7¢ to $1.89/MMbtu.

In London, the new front-month June IPE contract for North Sea Brent dropped $2.53 to $118.68/bbl. Gas oil for May lost $14.50 to $998/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $2.12 to $116.98/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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