By Jeanine Prezioso
NEW YORK, July 2 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
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
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)
"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.