What if WTI is now a broken benchmark because it’s too high relative to the rest of the world?
What is striking about the widely discussed “rise in oil prices” recently has been the fact that over the last few months, it’s essentially been a rise in one oil price: the one that trades in Cushing. It’s the one that not long ago was lagging the rest of the global oil complex by so much that companies, including airlines, abandoned it as a benchmark.
Taking a look at various price changes since both March 1 and May 1, shows that the price of WTI has rise about 13.4% from March 1. On May 1, the Platts’ WTI assessment of $91.05 was about $1 more than the March 1 assessment, so the increase through last Friday was also more than 13% – 13.25% to be exact.
But those gains are far more than those of any other key crude or products benchmark. After listening to years of criticism that the WTI price was no longer reflective of the broader oil market, with excess supplies of crude at Cushing dragging down the price, it’s as if the commodity took a New Year’s resolution in 2013 to become part of the conversation again.
So while WTI rose 13%-plus since both the beginning of March and May, the respective increases posted by other crudes and products are notable.
NY harbor RBOB: up less than 1% since March 1, up 7.6% since May 1.
NY ULSD: down 3.1% since March 1, up 6.4% since May 1.
Dated Brent: up 6.1% since March 1, up 10.6% since May 1. As a result of the rise in Brent lagging the rise in WTI, the dated Brent-WTI spread has moved to about $4.20/b last Friday compared with about $19.86/b on March 4.
Group 3 ULSD, notable because it’s likely to actually be produced from WTI: down 1.1% since March 1, up a bit less than 5% since May 1.
Gulf Coast pipeline ULSD: down 2.5% since March 1, up 7.4% since May 1.
LLS: down 2.5% since March 1, up 7.2% since May 1.
And most bizarre of all, the WTI market has moved into backwardation. Even with total crude inventories in the US still hovering near the all-time high levels of about 1.08 billion-1.09 billion barrels — and Cushing stocks also near an all-time high — the spread between first month and second month light sweet crude on the NYMEX is in backwardation, settling Friday at $103.22/b for August and $103.05/b for September. That may take a little air out of the WTI surge, according to Citi’s Tim Evans, in a report released last week.
“The recent move into backwardation creates an incentive to draw down inventories, which can further tighten the backwardation in turn,” he wrote. “Recent trade flows have included managed money [and] long accumulation of WTI crude oil, supporting the front of the curve for now, but creating an overbought condition that increases the risk of long liquidation that could weaken the market over the intermediate term.”
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My colleague Esa Ramasamy noted that there are a few fundamental reasons for the narrowing as well. The expected completion of TransCanada’s 700,000 b/d Cushing to Nederland, Texas, Gulf Coast pipeline project — sort of the southern tail of the original Keystone XL proposal — is now set for the third quarter/fourth quarter of this year.
He noted that traders believe the narrowing of the Brent-WTI spread is largely due to the levels at which WTI at Midland is trading in Houston. That number has moved in to about the equivalent of ICE Brent minus 50 cts, helping to pull in WTI. ”The divergence between where WTI Midland is trading at Houston and where the futures market for Brent/WTI is now starting to converge,” said a Gulf Coast refiner. (And in fact the percentage gains for WTI-Midland have been on pace with those for the Cushing barrel, which could signal that Midland is giving support to Cushing.)
Clearly, WTI is a lot closer to the rest of the oil world now than it was just a few months ago.