By Robert Campbell
NEW YORK, June 6 Traders who have bet on a
narrowing of the spread between Brent and West Texas
Intermediate crude oil futures are nearing a moment of truth.
Stocks of crude oil in the U.S. Midwest are at an all-time
high. Ditto for inventories at Cushing, Oklahoma, the delivery
point for WTI futures.
Unless inland crude stocks decisively break with the current
upward trend, and do so very soon, a fresh blowout in the
Brent-WTI spread looks increasingly likely.
Already the fast-convergence thesis is looking in trouble.
The startup of the 150,000-barrels-per-day Seaway pipeline in
late May has so far made no impact on crude stocks at Cushing.
Lags in data and the likelihood that Seaway may have taken
some time to reach full capacity mean the jury may be out on
this question for another week or two.
But refinery problems, notably the unplanned shutdown of a
crude unit at BP's Whiting, Indiana refinery last week,
could well offset any gains from Seaway's running at capacity.
Without the catalyst of a sustained drop in Cushing crude
stocks, the risk rises that traders who are long the spread may
Add the likelihood of fresh wagers on a widening of the
Brent-WTI spread and the playing field starts to look tilted
against convergence bets, at least in the short term.
The same may well go for WTI timespreads. The contango in
WTI has flattened considerably as traders anticipate an end to
the oversupply at Cushing.
But such bets too may well be targeted for unwinding, at
least at the front of the curve.
MAYBE NEXT YEAR
A further risk to the short-term Brent-WTI convergence
thesis looms in planned refinery maintenance in the second half
of 2012 and early 2013.
Major shutdowns are planned at BP's Whiting refinery and
Marathon's Detroit facility in that period as the two
companies complete upgrades.
Those shutdowns, combined with increased oil production from
shale plays, are likely to pressure overall inland balances, and
the Brent-WTI spread.
Routine autumn maintenance will only add to the pressure.
Similarly, the rise in shale oil output is chipping away at
the anticipated impact of some projects on the situation at
Take Magellan Midstream Partners' Longhorn pipeline.
This project, due for startup in 2013, was expected to relieve
pressure on Cushing by diverting crude from West Texas to the
The current discount on crude at Midland, Texas, where
WTI-deliverable barrels each fetch some $4-$5 less than
they might at Cushing due to pipeline bottlenecks, speaks
The "mini-Cushing" situation at Midland means the risk is
now that Longhorn, and similar projects, only relieve partially
the oversupply at Midland, leaving flows to Cushing unaltered.
Fresh pipeline projects should boost takeaway capacity from
Cushing, starting in early 2013 with the upgrade of Seaway to
around 400,000 bpd.
But these must be balanced with fresh inbound supplies,
including planned lines from new Oklahoma shale plays, North
Dakota, and other areas.
A decisive factor could well turn out to be the price of
WTI. The recent selloff has likely affected drillers, but for
the moment the psychology of most operators is likely colored by
average prices, which have not been hit hard.
That may change, however, if WTI stays in the $80 range for
longer. Bear in mind that most inland crude oil fetches less
than the WTI price and some production will start to look
vulnerable to weaker pricing.
Talk has emerged, probably prematurely, that Canadian oil
sands growth is under pressure.
While this may prove to be true for smaller projects, most
of the large ventures are difficult to slow down, especially as
huge commitments to pipe oil are unlikely to go away.
Companies active in shale plays, however, are starting to
push suppliers for discounts on field services. That's an
important early indicator of firms' willingness to curb growth
as a way of preserving profitability.
If North American oil production growth slows, it would give
pipeline firms time to catch up with the glut.
But that puts a lot of variables into place. Traders trying
to front-run the narrowing of the Brent-WTI spread have already
been badly burned.
Another blowout could make the futures market reluctant to
embrace convergence without more evidence next time around.