UPDATE 1-After three-year discount, US crude returns to Brent parity
(Recasts, adds details on WTI/Brent spread and analysts' outlooks)
NEW YORK, July 19 (Reuters) - Benchmark U.S. crude oil futures briefly returned to a premium over Europe's Brent for the first time in nearly three years on Friday, a major milestone in a weeks-long U.S. crude price rally that has upended global oil markets.
The gap between West Texas Intermediate (WTI) and Brent, a closely-watched and heavily-traded spread that marks the difference between similar crudes in Cushing, Oklahoma, and the North Sea, has vanished with shocking speed, narrowing from $10 a barrel in early June to put U.S. crude at a 5 cent premium earlier on Friday.
The last time WTI traded at a premium was in October 2010, when a handful of smaller oil producers like EOG Resources and Continental Resources were starting to use hydraulic fracturing and horizontal drilling to unlock vast shale oil reserves.
That month, North Dakota's Bakken shale output had edged up to 350,000 barrels per day (bpd); today it pumps more than twice that. The Eagle Ford shale in Texas, which may reach 1 million bpd within a year, was all but non-existent.
The surge in output led to the dramatic dislocation of the U.S. oil market, with WTI -- traditionally traded within a few dollars of Brent -- falling to a discount of as much as $28 a barrel.
Fast-growing Bakken shale and Canadian oil sands crude accumulated in Cushing, which lacked pipelines to transport the growing glut of Midwest crude to Gulf Coast refiners.
Their eventual convergence has long been predicted, but arrived this summer with unexpected speed, fueled by the start-up of new pipelines diverting crude away from Cushing, the restart of BP's large Whiting, Indiana, refinery after a half-year-long revamp, and diminished production from the Canadian oil sands.
Yet few analysts expect the parity to last.
U.S. refiners, many of whom have enjoyed three years of bumper margins thanks to cheaper domestic crude, are now facing higher costs, spurring some to seek Brent-linked imported oil. U.S. rail shipments from North Dakota's Bakken shale have begun to slow as the spread is no longer wide enough to cover the higher cost of shipping oil by train.
"The competitive advantage that Midwest refineries had relative to its Gulf Coast and East Coast peers is slowly fading away and poses a barrier for further increases in WTI prices, in our view," analysts at Barclays wrote in a note this week.
The question is how quickly the spread will expand again.
The Brent/WTI spread for April-delivery contracts <CL-LCO8=R> now stands at $5.90 a barrel.
UBS AG said in a recent 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.
Analysts at Barclays say they see the spread at $11 a barrel, on average, in 2015.
The September front-month spread <CL-LCO1=R> settled with Brent at a 20 cent premium to WTI on Friday.
(Reporting By Jeanine Prezioso; Editing by Chris Reese)