Schork Oil Outlook: Brent Premium to WTI — When Does it Die?
Crude oil supplies in PADD II Midwest (inclusive of the Nymex hub in Cushing, Okla.) have been trending higher over the last two months. At the NYMEX hub alone inventories have risen for eight straight weeks by a total of 5.7 MMbbls or 18%. Consequently, supplies here finished 2010 at the 7th highest recorded level, 37.5 MMbbls, since the DOE began disaggregating the data for Cushing in 2004.
Furthermore, Canadian exports into PADD II have ballooned 79% since 1993. Thanks to attractive economics for oil sands projects, exports have risen by 15% over the last five years alone.
As such, greater access to oil in the U.S. heartland brings the context of the current disparity between the London Brent market and the New York WTI market in to focus. In today’s Chart of the Day we have plotted the return on holding crude oil inventory in PADD II, as measured by the ratio of the WTI/Brent since large scale oil sands became economically viable.
Demand for WTI relative to Brent can be inferred from the trendline running through this scatter plot of the spread and DOE estimated storage. When the scatter point lies below the trendline, it is understood that demand for stored crude oil in Cushing is below normal and/or supplies are abundant.
We can also infer that there is a negative correlation between storage at the Nymex hub and the WTI/Brent spread since 2005, i.e. as storage in PADD II increases, WTI’s premium to Brent narrows, hence WTI’s current discount to Brent.
In this vein, as margins on natural gas production have waned, Canadian producers have shifted focus to crude oil. Per Baker Hughes, the ratio of gas-to-oil rigs has morphed from 3/1 (2005 to 2009) to 5/8 as of the start of this year.
In other words, there will be no shortage of Canadian crude oil this year… and that means that just because Brent’s current premium to WTI appears illogical, it doesn’t mean it cannot last for a while longer.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.