UPDATE 2-Goldman closes Brent/WTI call as spread hits 2.5-year low

Tue Jul 2, 2013 5:35pm EDT

By Jeanine Prezioso

NEW YORK, July 2 (Reuters) - Goldman Sachs Group Inc closed its trading recommendation to buy U.S. crude oil and sell Brent oil on Tuesday, as the closely watched spread between the European and U.S. benchmarks reached its narrowest since early 2011.

Goldman said in a report that it expected the spread to narrow in the medium term as new pipelines help shift a growing glut of U.S. light, sweet shale oil from the Cushing, Oklahoma, physical delivery point down to the Houston trading hub, moving pressure from the inland WTI contract to sea-borne Brent.

While cautioning that "the risks in the near term are clearly to the upside," or a narrower WTI-Brent spread, analysts said in the report that the risk/reward of the trading call for a $5 spread, which it opened on Aug. 21, was "less attractive."

The front-month August spread between WTI and Brent narrowed to a new low of $4.15 per barrel on Tuesday, the narrowest point between the two grades of crude since January 2011. It settled at $4.40.

Goldman based its call on the September spread, which settled on Monday at $4.61 per barrel, 39 cents below the firm's target. The spread settled at $4.06 on Tuesday after narrowing to $3.81.

It has not been an easy ride for Goldman's call. As recently as March, the spread had ballooned to more than $15 a barrel.

But Goldman expected an expansion of pipeline capacity to reduce the bottleneck between Cushing and U.S. Gulf Coast (USGC) refineries.

"Over the medium term, we expect the WTI-Brent differential to widen again as the USGC becomes increasingly saturated in light sweet crude oil," the analysts said in the report.

An increase in pipeline and rail capacity that will allow U.S. refiners to draw crude out of Cushing has led traders to bet on WTI as the go-to crude, rather than Brent imports from the U.S. Gulf Coast.

On Monday, BP Plc said it completed the start-up of a new 250,000 barrel-per-day (bpd) crude distillation unit at its 413,000 bpd Whiting, Indiana, refinery. The start-up will help absorb Canadian crude that might have otherwise pooled at Cushing.

New lines out of the Permian Basin in West Texas, another large oil-producing basin where output is booming, are also helping relieve the build-up at Cushing by redirecting it to the Gulf Coast. One of those lines, Sunoco Logistics Partners LP's 90,000 bpd Permian Express, is due online in July.

Planned new pipeline capacity from the Permian Basin in West Texas "should comfortably handle output by the end of 2015," analysts at RBN Energy, LLC said in a note on Tuesday.

Other banks chimed in later in the day with forecasts for the Brent/WTI spread.

Deutsche Bank AG revised higher its long-term forecast for the differential between the two crudes to $15 per barrel by 2016 compared with an earlier forecast of $11.70.

Its 2013 forecast was revised lower to around $10 per barrel versus a previous forecast of $13.30. The Brent/WTI spread will fall to $5/bbl by 2018, then dip to around $4/bbl in 2019 and 2020, the bank said in a report.

UBS AG said in a report that it expects WTI's discount to Brent to widen to $12 in the third quarter and then narrow slightly to $10 in the fourth quarter and $6 per barrel from the second quarter of 2014.

Front-month U.S. crude oil futures settled $1.61 per barrel higher at $99.60 after trading at a nine-month high near $100 per barrel. Brent crude oil futures ended the day $1 per barrel higher at $104.

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