Don't mess with West Texas: US oil to keep outpacing Brent
U.S. crude, whose market price Friday exceeded its international counterpart for the first time since 2010, is expected to continue its relentless advance if the United States keeps outperforming other major economies.
Economic problems have waylaid both China and Europe—two of the world's most voracious crude consumers—and darkened the outlook for global demand.
But that has done little to impede the rally in West Texas Intermediate, which over the past year has surged by more than 18 percent as U.S. demand outpaces that of other countries. Simultaneously, global benchmark Brent has slumped by 5 percent.
"We have seen a considerable amount of WTI outperformance relative to Brent recently as the U.S. economy outperforms other global economies such as the euro zone, U.K. and certain parts of Asia," said George Davis, chief technical analyst at RBC Capital Markets in Toronto.
"With new and reversed pipelines now in place and an improved rail infrastructure providing the increased capacity to move crude, the glut that has been weighing on WTI relative to Brent has largely been removed," he added.
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On Friday, both contracts traded above $109, with WTI hitting its highest level in a year and trading at a premium to Brent for the first time in nearly three years. Analysts were surprised more by the pace than the direction of the move.
WTI shines amid surging production, demand
A host of factors have helped buttress WTI. U.S. stockpiles have dwindled in the face of strong domestic demand, and the world's largest economy has proved far more resilient than other big economies.
In theory, soaring oil production is creating supply that should push down crude prices. Instead, some analysts say the increased supply raises the possibility that the U.S. will become a major non-OPEC oil producer. That's is enhancing the value of WTI in a world roiled by geopolitical turmoil and slumping economies.
James Fallon, director of consulting at research and analytics firm IHS, cited a sharp drawdown in U.S. inventories for the third straight week as having sent "a bullish signal" to the market to buy domestic crude.
If next week's inventory data from the Energy Information Administration again beats market expectations, WTI could be pushed higher. But U.S. crude "may have overshot a bit" for now, Fallon said, adding that he expects the Brent/WTI spread to widen to as much as $4 within the next three months.
Key pipeline restarts have contributed to more oil flowing out of Cushing, Okla.—a major delivery point for WTI—to thirsty markets nationwide. The hub has seen stocks plunge to 46 million barrels from 52 million at the start of the year.
"The ability to get crude out of Cushing has increased, and indirectly tied to Cushing inventory are new pipelines that have started up in West Texas to connect directly to the Gulf Coast," Fallon said.
Meanwhile, a shortfall of Canadian oil that normally finds its way into U.S. markets may keep upward pressure on the WTI contract.
Sabine Schels, global commodity strategist at BofA Merrill Lynch Global Research, said in an interview with CNBC Europe that Canada's production "has severely disappointed, because you've had a number of outages ... [and] you had weather issues that led to Canadian flows being disrupted on pipelines."
—By CNBC's Javier David