MARKET WATCH: WTI, Brent price spread widens

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 13 -- Front-month oil prices fell Feb. 12 to the lowest closing price since late December on the New York Mercantile Exchange but increased on IntercontinentalExchange Inc.'s futures exchange in Europe as the spread between benchmark US light, sweet crudes and North Sea Brent continued to widen.

"The spread between West Texas Intermediate and Brent has once again widened to $10/bbl, and oil's contango continues to steepen," said analysts in the Houston office of Raymond James & Associates Inc. They and others blame bulging inventories and the pending expiration of the NYMEX March contract Feb. 20. "Cushing[,Okla., crude] storage is now up to 34.9 million bbl and will likely test its maximum capacity threshold, which is estimated at 37-39 million bbl," the analysts said. The front-month crude price has declined for five consecutive trading sessions on the New York market and appears to be headed for the biggest 1-week loss this year.

"The differential between WTI and carrots is currently as well defined by arbitrage as is the WTI-Brent differential," said Paul Horsnell at Barclays Capital Inc. Moreover, the $10 Brent-WTI spread, the combination of an $8/bbl spread between the March and April crude contracts on NYMEX and "the [premiums] to WTI commanded by Gulf Coast crudes are all strong indications that WTI is not currently even a good benchmark for the totality of the US market, let alone the global market," he said.

Horsnell said, "The main source of strength [in the US market] remains gasoline, with inventories tightening relative to normal, and with demand conditions improving significantly."

Still, OPEC reported Feb. 13 that the move at its last meeting to reduce production "appears to have halted the downward slide in prices to excessively low levels, despite a steady stream of negative economic and demand data." It said, "The OPEC reference basket rose $2.92/bbl or 7.6% in January to average $41.52/bbl, with prices remaining around the low $40/bbl range since the start of the year."

The average price for OPEC's basket of 12 reference crudes lost 51¢ to $41.79/bbl on Feb. 12.

Supply, demand concerns
With the rapid drop in drilling activity this year, Horsnell said, "Our concern remains that, short of a long-lived and very deep demand depression, the oil market may well be setting itself up for a significant [supply] capacity crunch in coming years."

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., said, "Canadian oil sands development activity has gone from a hurried pace to almost a standstill in a very short time."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "Despite the unrelenting market focus on demand at this point, concerns about the impact of low prices on the oil supply outlook are growing. We see non-OPEC supplies falling by 200,000 b/d in 2009, but with world gross domestic product growth likely to be negative, demand estimates continue to fall faster than supply forecasts, keeping pressure on [OPEC] to cut quotas at least one more time."

Sieminski noted, "Gold is the only component of the Deutsche Bank Liquid Commodity Index that has posted positive returns since the end of last year. …In contrast, the DB Crude Oil Index has been the worst performing component of the DBLCI, declining by 6.1% over the past week."

In order to pump up the world's sagging economy, he said, "Governments will need to marshal considerably more resources than are politically palatable currently to deal effectively with the current crisis. A growing likelihood that they will fail to do so soon points to a slow and bumpy ride ahead."

Wood Mackenzie Ltd., Edinburgh, predicted Feb. 13 global GDP will contract by 0.6% in 2009, leading to lower global oil demand of 84.3 million b/d for 2009, down 1.5 million b/d from 2008. It is forecasting a deeper and longer recession lasting far into 2010. Julie Beatty, principal economist for the consulting firm, said, "The leading economic indicators from the fourth quarter of 2008 reflect the collapse in the financial markets and global trade flows since October where industrial output fell between 5-20% on a year-on-year basis across both developed and emerging economies."

WoodMac reported, "The initial wave of stimulus packages do not appear to be sufficient to offset contraction in growth this year. With the exception of India and Brazil, virtually all countries are experiencing either an outright recession or a growth recession. The rapid deterioration in growth in China coupled with further contraction in industrial output in Japan have meant that the Asian 'tigers' have been unable to quarantine their economies from the financial crisis."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "Historically, when the calendar reached February, investors would become concerned about the spring refinery maintenance schedule and whether or not the level of gasoline inventories would be adequate for the summer driving season. This usually led to refining margin and stock price gains. However, after a 6% demand decline in 2008, and expectations of another consumption drop in 2009, we do not expect this historical pattern to occur in 2009 since spare refining capacity is abundant. Moreover, with refinery maintenance in the first half of 2009 at its highest in January, we agree with the forward curve forecast that refining margins will peak for this year in the first quarter and decline into 2010.

Energy prices
The March contract for benchmark US light, sweet crudes dropped $1.96 to $33.98/bbl Feb. 12 on NYMEX. The April contract lost 30¢ to $42.17/bbl. On the US spot market, WTI at Cushing, Okla., continued to duplicate the price of the front-month NYMEX crude and was down $1.96 to $33.98/bbl. Heating oil for March delivery inched up 0.54¢ to close virtually unchanged at $1.32/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) declined 1.15¢ to $1.26/gal.

Natural gas for March lost 4.7¢ to $4.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.5¢ to $4.69/MMbtu.

In London, the March IPE contract for North Sea Brent crude gained 37¢ to $44.65/bbl. Gas oil for February was unchanged at $411.50/tonne.

Contact Sam Fletcher at samf@ogjonline.com.