For a presentation that reviews the latest macro trends in the energy industry, please click here.
This month we’ve dedicated a few slides to discussing the sharp rise in WTI oil prices vs. international crudes. In late June and early July, there has been a large drop in the open interest of WTI contracts while the front month Brent – WTI spread has fallen to $3.00/Bbl currently. Nevertheless, the Louisiana Light Sweet (“LLS”) – WTI spread continues to sit at $7.00/Bbl. If there was a true physical de-bottlenecking taking place, we would expect LLS pricing to fall relative to WTI. We would also expect to see a decline in Cushing inventories, but this has yet to happen on a significant scale.
The likely cause of this narrowing Brent-WTI spread is increasing transparency around pipelines that will de-bottleneck Cushing, OK (delivery point for the WTI contract) over the second half of 2013. Currently, inventories at Cushing, OK are reported at 46.0 Mil. Bbl, near their record high of 51.9 MMBbl in January. Permian pipeline additions will divert crude volumes away from Cushing, OK and to the Gulf Coast by an estimated 250,000 Bbl/Day by 4Q 2013. Additional pipeline takeaway capacity from Cushing, OK from the Seaway pipeline will also also help alleviate the the bottleneck. Due to these pipeline projects, oil inventories at Cushing, OK should decrease rapidly by the end of the year.
Over the longer term, we expect strong U.S. domestic crude production growth to significantly decrease the amount of light and medium crude imports to the U.S. This may create a new bottleneck for light and medium crudes on the U.S. Gulf Coast. With no ability to export crude and no additional refining capacity for light and medium crude, growing crude volumes may have difficulty finding a market. In this scenario, which the market appears to be anticipating, both WTI and LLS will likely again trade at significant discounts to international crudes.