21 January 2011 18:05 [Source: ICIS news]
By Giovanni Coiro
Only minimal tightness on some grades in the
While WTI is closely linked to the
By contrast, Brent can be moved to Asia or the
“The persistence of several factors contribute to making a Brent premium over WTI more the norm rather than the exception, at least for 2011 and potentially 2012,” BNP Paribas analyst Harry Tchilinguirian said in a research note on 18 January.
Persistent oversupply at Cushing, and the differences in supply and demand dynamics compared to the Brent market, have resulted not only in a drop in the WTI futures curve relative to Brent but a clear difference in the steepness of the contango structure between the two markets.
While the Brent forward curve remains flat, the WTI curve is much steeper.
Currently, the front month March contract for Brent is trading around $0.07/bbl lower than the April contract, while on WTI the March contract is $1.45/bbl lower than April.
In the futures markets, an oversupply of the underlying commodity leads to a widening contango of the futures curve: the oversupply of WTI at Cushing is causing this scenario in WTI futures.
“While US crude oil inventories have regularly declined, mainly on the
Because storage capacity at Cushing is constrained and because crude at the hub is landlocked any surplus material translates into a steeper contango.
And the situation has been exacerbated in the past couple of years by upgrades that have given refineries a greater ability to refine heavier crudes.
The Keystone pipeline being built by TransCanada and set for first half 2011 start up will be another factor in keeping Cushing oversupplied.
TransCanada is set to build a pipeline to take crude from Cushing to the
“The second phase of TransCanada’s Keystone pipeline expansion is reportedly to begin service this quarter, delivering more Canadian oil directly to Cushing. A further extension of the pipeline to the
Another factor that can explain the price diversion is the higher demand for North Sea crude from outside Europe, particularly from
At the same time the different contango structures have led investors away from WTI to Brent to reduce their negative roll-yield.
A negative-roll-yield is the loss an investor incurs in a contango market when selling the expiring front-month and buying the next month's contract.
As the forward months in the WTI market are much higher than the front-month when compared with the Brent market, investors lose more money rolling their contracts when the front-month expires than would otherwise occur in the Brent market, which is less steep.
The difference in the two markets could prompt investment flows to shift away from WTI to Brent, resulting in the Brent front-month contract trading higher.
But in contrast to the WTI structure, the Brent forward curve is structurally relatively flat.
This can be explained by the difference in demand dynamics in the Brent physical market and the decrease in oil production in the
A physical trader in the
In its monthly oil market report in January, OPEC forecast oil supply from
With changes in supply in WTI and Brent crudes expected to continue for the foreseeable future, coupled with investment money flows adjusting to these changes, the differential between the WTI and Brent futures markets is expected to persist.
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