MARKET WATCH: WTI price discount to Brent hits new high

The front-month contract price for benchmark US crude continued to fall Feb. 8 in the New York market, widening its discount against North Sea Brent oil to a record $13.05/bbl at midday in the session on reports US inventories continued to build.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 9 -- The front-month contract price for benchmark US crude continued to fall Feb. 8 in the New York market, widening its discount against North Sea Brent oil to a record $13.05/bbl at midday in the session on reports US inventories continued to build.

“Yet another increase in Chinese interest rates as well as subsiding fears over an Egyptian supply disruption, despite unsubstantiated (and eventually disproved) rumors of a strike by Suez Canal workers, left New York crude down 0.6%,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas fell 1.6% to its lowest level since November as expectations for warmer-than-average temperatures in mid-February muted demand.”

West Texas Intermediate now is back to “pre-protest levels” around $88/bbl “after an increase in Chinese interest rates by another quarter point (the third increase in 3 months,” Raymond James reported. “While an uncertain political outlook in the Middle East and North Africa may continue only as a short-term driver of oil prices, monetary tightening in China—the world's largest energy consumer and a significant driver of oil demand growth—may just have some legs on it.”

The surprise of China’s latest rate increase “was not in the action but in the timing as the increase in rates is closer than expected to the previous one,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “China’s Consumer Price Index (CPI) was on an upward trajectory for much of 2010, with December’s CPI at 4.5%. The Producer Price Index (PPI) has also been trending upwards, a sure sign of growing pipeline inflationary pressures.”

However, he said, “We rate the effect of monetary tightening in China on oil prices as fairly benign. Currency devaluation and increasing reserve requirements appear to have no discernible impact. While credit rationing and higher interest rates do appear to have a noteworthy effect, these are relatively minor when compared to their impact on other commodities, especially the base metals.”

Term structures for WTI continue to weaken, while the term structures for Brent and the ICE gas oil contract have strengthened on the back of the divergence in flat prices of WTI and Brent, he said.

While political tension in Egypt is fast disappearing from news headlines, the credit default swaps for the 5-year Egyptian government bond fell further yesterday “to the lowest level since the protests started,” said Zhang.

US inventories
The Energy Information Administration said Feb. 9 benchmark US crude inventories increased 1.9 million bbl to 345.1 million bbl in the week ended Feb. 4. That was just below the Wall Street consensus for a 2 million bbl build. In that same period, gasoline stocks rose 4.7 million bbl to 240.9 million bbl, exceeding analysts’ expectations for a 2.6 million bbl increase. Distillate fuel inventories gained 300,000 bbl to 164.4 million bbl, while the market was anticipating a 1 million bbl decline, EIA officials said.

Imports of crude into the US declined by 105,000 b/d to 8.9 million b/d in that same week. In the 4 weeks through Feb. 4, US imports of crude averaged 9.1 million b/d, up 783,000 b/d from the comparable period last year.

The input of crude into US refineries inched up 42,000 b/d to 14.3 million b/d last week with units operating at 84.7% of capacity. Gasoline production increased to 9.1 million b/d while distillate fuel production advanced to 4.3 million b/d.

The American Petroleum Institute earlier reported US crude stocks fell 558,000 bbl to 345.98 million bbl in the week ended Feb. 4, with gasoline inventories up 3.2 million bbl to 239.7 million bbl. API reported distillate fuel stocks dropped 538,000 bbl to 160.7 million bbl.

Energy prices
The March contract for benchmark US sweet, light crudes dropped 54¢ to $86.94/bbl Feb. 8 on the New York Mercantile Exchange. The April contract declined 40¢ to $90.24/bbl. On the US spot market, WTI at Cushing, Okla., was down 54¢ to $86.94/bbl.

Heating oil for March delivery increased 2.57¢ to $2.73/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 4.37¢ to $2.49/gal.

The March natural gas contract lost 6.4¢ to $4.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 7¢ to $4.25/MMbtu.

In London, the March IPE contract for North Sea Brent traded as high as $100.42/bbl during the session before closing at $99.92/bbl, up 67¢ for the day. The soon-to-expire February gas oil contract increased $4.75 to $849.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained 10¢ to $96.12/bbl.

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