For only the third time since 2010, U.S. benchmark West Texas Intermediate crude traded at a premium to global marker Brent on Monday, restoring for a few brief moments what was once the normal hierarchy of the world oil market.
While the premium lasted less than five minutes before U.S. futures CLc1 closed at a 70-cent discount, a growing number of oil traders say WTI could ride high for days if not weeks in the near future, the latest surprising twist in a closely watched spread that has flummoxed the market for the past five years.
The reason they cite for the inversion in the so-called Brent/WTI spread CL-LCO1=R: the lucrative but temporary appeal of buying U.S. crude for storage in Oklahoma oil tanks.
As OPEC chooses to maintain output, an expanding surplus of crude has hammered global markets, driving both WTI and Brent down by some 60 percent since June and putting near-term oil prices at a $9-a-barrel or more discount versus those in a year's time - a structure known as "contango" that makes it advantageous to buy crude now and store it for later sales.
But for traders in the main European markets, that means chartering supertankers to use as floating storage at a cost of $1 a barrel or more per month, traders say. A dozen or so have already been fixed, Reuters has reported.
By contrast, physical crude storage at Cushing, Oklahoma, the delivery point for U.S. futures, is far less expensive than offshore storage - as little as 40 to 60 cents a barrel per month. That demand for storage has lent a measure of support to the collapsing market, moreso than for North Sea Brent.
"The cost to store the next barrel at Cushing is small compared to the cost to store the next barrel of Brent," said Amrita Sen, chief oil analyst at Energy Aspects in London. "We thought that (the spread) was going to narrow, but it's happened earlier than we expected."
To be sure, several other important factors are also helping unwind a discount that has persisted since the onset of the shale oil revolution, when expanding output of domestic light, sweet crude became bottlenecked inside the United States, caused WTI to fall to a discount of more than $25 versus Brent.
For one, the risk of an ever-expanding glut is subsiding as sub-$50 a barrel crude prices begin to slow, if not stop, the ever-rising tide of shale production. Also, the United States has moved to allow more export of some domestic crude by approving some pending requests and considering a deal to ship some oil to Mexico, alleviating the bottleneck.
REOPENING THE WINDOW
The inversion of the spread comes after a seven-month slump in the crude oil markets that has more than halved prices on the back of a supply glut coupled with lackluster demand. Both U.S. crude and Brent traded near six-year lows on Tuesday. [O/R]
Just as few analysts anticipated the second-worst oil rout on record last year, so too have few expected Brent/WTI to flip again. As recently as December, analysts expected Brent to trade at a $4 premium to WTI in the first quarter, according to a Reuters poll. None were predicting parity. OILPOLL
Since the start of the year, the spread narrowed 85 percent. On Monday, the spread settled at $1.36 a barrel, down from a $1.75 a settlement on Friday.
Oil traders and refiners are already moving to take advantage of the narrower spread, not only by storing crude but by exploiting what could be the first sustained reopening of the trans-Atlantic crude oil arbitrage window in years.
Despite the shale boom, which has yet to slow as already-drilled wells yield more and more crude, the narrowed spread means that foreign crudes delivered into the U.S. market once again appear attractive to U.S. refiners. Nigerian light, sweet Qua Iboe QUA-E has traded at its lowest differentials since around 2005, increasing the arbitrage allure.
On Monday, oil refiner Tesoro (TSO.N) booked a one million barrel tanker to take West Africa to the U.S. Gulf, a route that these days is rarely run. Vitol also chartered the SCF Altai on the same day with the option for U.S. delivery. [TAN/D]
Domestic competitors are taking a hit as a result. Mainstay Gulf Coast grade Light Louisiana Sweet WTC-LLS delivered into St. James, Louisiana, has fallen to a premium of only 80 cents a barrel over WTI, one of the lowest levels since 2008.
U.S. VACANCY AVAILABLE
Across the United States, onshore tanks are barely a third full, data show. And in Cushing itself, the most appealing place for a storage trade, only about 32 million of the more than 80 million barrels of storage capacity is full.
"We have the only empty storage space in the world. And so, all the oil is being pushed here," said one physical trading source.
Yet few expect the structural issues to have disappeared entirely, with U.S. oil production still rising and export constraints in place. Any period of parity may be short-lived.
Goldman Sachs this week slashed its short-term Brent/WTI forecasts from $10 a barrel to just $1 a barrel in the first-quarter, estimating onshore oil tanks and offshore floating tankers could absorb some 1 million barrels per day of surplus crude for nearly a year. But it said the spread would widen back to $6.50 by the fourth quarter as storage capacity runs out.
By the spring, Cushing oil inventories are likely to approach 80 percent of capacity, according to PIRA Energy.
"From a fundamental perspective, the current level of the Brent/WTI spread is unsustainable," analysts at JBC Energy said.