With U.S. oil production at a 20-year high, the shifting fundamentals of global oil supply are increasingly driving the price of U.S.crude closer to the generally higher-priced international benchmark.
In futures trading Tuesday, the price difference between U.S. West Texas Intermediate crude and the international benchmark Brent was at the closest it's been in eight months and is likely to narrow further.
The reason is that more of the North American oil supply that had been locked in the middle of the country is heading to coastal refineries, some by pipeline and some by train. That is making the U.S. less dependent on foreign oil, and has driven imports to the lowest level in 16 years.
West Texas Intermediate jumped more than 1.6 percent Tuesday, above $96 a barrel to a five-week high. Brent, the international bench mark, gained less - or 1.2 percent, trading at $109.46 in the electronic session.
There are multiple reasons for the shrinking gap between the two, and a key one is increased demand at U.S. refineries pushing WTI prices higher. Also U.S. shale production has displaced imports of West African crude into the Gulf Coast, and those barrels are now freed to go elsewhere in the world, according to John Kilduff of Again Capital. The weak European economy has also taken the pressure off of Brent, and West Texas Intermediate is benefiting from better U.S. economic picture, including Tuesday's durable goods report.
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"It's been more about pressure on Brent, about the euro zone economy and improved output from the North Sea. They're doing a lot better," he said.
"It's the end of the quarter so people are marking up their books, trying to push that and trying to show a nice profit in the first quarter if possible. The Brent-WTI spread is also being impacted by the same idea," said Addison Armstrong, analyst with Tradition Energy.
"I think there's going to be more downward pressure on Brent than there's going to be upward pressure on WTI. We really have a lot of oil here and we don't have a lot of Brent back in the system," he said.
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The U.S. is producing about 7 million barrels a day, the highest amount since December, 1992, while imports have fallen to 8.5 million barrels a day, the lowest since 1997.
"I think the fundamentals are such that there's plenty of oil everywhere you look in the world, and Europe is certainly slowing down,"said Armstrong. "I think the spread continues to move in and I would not be surprised to see it cut in half in the next few months."
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The spread at about $12.60 is the lowest since July, and it was as low as $11 in June. WTI "seems to be more in favor with the bulls than Brent at the moment. I think we can comfortably trade between $90 and $95, and that's what we're doing," Armstrong said.
Brent demand is the weakest it's been in a while. "It's European demand and the Mideast is flowing lots of oil to Asia so there's not much demand for Brent, particularly with all the production we've got going on here," Armstrong said. At the same time, U.S. gasoline demand is still relatively weak.
He expects to see U.S. crude supply up 2.5 million barrels, and gasoline supply drop 1.6 million barrels. He sees refinery runs up 0.4 percentage points. The U.S. Energy Information Administration data on oil inventories is released at 10:30 a.m. Wednesday.