FocusPrice gap persists between WTI and Brent crude benchmarks

23 March 2011 22:27  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS)--Oil industry observers differ on how long a persistent and large price gap between NYMEX WTI (West Texas Intermediate) crude and the Brent benchmark will last, an energy consultant said on Wednesday.

WTI crude prices began to part with Brent crude prices last summer. Some market observers trace the divorce to logistics and storage issues in North America. Brent crude is the European-based benchmark.

“The important thing right now is [that] prices for all benchmark crudes are $10-12/bbl higher than WTI prices,” said Dan Lippe of consultancy Petral Worldwide.

Brent crude oil was $12.86/bbl more than the closing price of WTI on the NYMEX, $101.42/bbl, on 18 March.

The relatively low price of WTI translates into a large crack spread - the price difference between crude and refined products - for refiners using WTI.

In December, the crack spread for NYMEX gasoline was more than $11/bbl for the first time since June 2010. Unlike in June, however, the spread continued to widen, reaching more than $25/bbl on 1 March, which has not been seen since before 2007.

The situation has caused a rise in US refined products relative to crude as they track the global crude market.

How long the situation will last is a matter of opinion.

Anne Keller, president of consultancy Midstream Energy Group, said, “Latest guesses for the markets to ‘normalise’ is two to three years, but that depends on drilling continuing to stay strong in the oil shale regions like the Bakken [which runs from Montana into Canada] and no refinery expansions to take up the surplus.”

Recently Valero announced expansion of its McKee refinery in Texas and Tesoro announced the expansion of its Mandan refinery in North Dakota to help absorb crude from the Bakken Shale.

But history suggests the trend of high crack spreads and resulting profits will not last.

Amy Claxton of consultancy My Energy said, “All I can tell you is it’s anyone's guess on strong refined crack spreads and how long they'll hold up - but history would suggest that the cycle will dampen and things will [equalise] in the coming months.”

“High crack spreads mean refineries have strong profit margins - prices for motor gasoline and diesel fuel minus some assume cost of crude oil,” Lippe said.

Refiners processing WTI crude oil, or a similarly priced light, sweet crude, sell gasoline and distillates into the global market at a significantly higher profit margin than refiners processing most other crude grades.

Claxton said WTI crude is run strictly at US refineries, and 35-40% of those run WTI on an annual basis as part of their “crude diet.” However, Claxton said only about 3-4% of US refiners process solely WTI.

The US midwest is the primary region where WTI crude is processed. Midwest refineries have an operable capacity of 3.728 bbl/day, 21% of total US capacity, according to the US Energy Information Administration (EIA).

WTI makes up a portion of the crude diet in the US, which imports around 9m bbl of foreign crude to satisfy its appetite.

Keller traced the relatively low price of WTI to logistics and storage issues in North America.

“WTI prices currently reflect a logistics bottleneck that keeps the barrels from moving freely to access refinery markets on the Gulf coast,” Keller said. “Since Brent can trade in the global market without these physical restrictions, it’s currently seen as more representative of the global market crude for the crude futures markets.”

The price of WTI is relatively low because supplies are high in the US midwest. With low refinery rates in early- to mid-2010, in addition to pipelines bringing in Canadian crude, there is a bottleneck to deliver crude oil to the Cushing hub in Oklahoma. Refineries in the US cannot consume enough crude oil to ease supplies.

“The only ways to deal with the combined new flows from Canada and from within PADD 2 [the US midwest] are to add new storage to absorb higher volumes, and to find relief by moving crude oil out of Canada to the Pacific coast via new pipelines,” according to a February Credit Suisse commodities report.

According to the report, at the end of the first quarter there is expected to be 3.5m bbl of additional storage, and another 10m bbl by the end of 2011.

By: Sheena Martin
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