The front-month Brent/WTI spread narrowed Thursday to its lowest level in more than 20 months, dropping under $1/barrel as NYMEX crude broke above resistance levels on recent stock drops and an equities euphoria.
The September Brent/WTI spread narrowed to 84 cents/b -- a level not seen since November 2010.
"All of the action is in WTI," said Matt Smith, commodity analyst at Schneider Electric.
Focus has returned to NYMEX crude, Smith said, as traders preemptively get behind a market that has seen a cumulative 27 million crude oil barrels over the past three weeks removed from US stocks.
At the NYMEX crude delivery hub at Cushing, Oklahoma, crude stocks have depleted some 3.6 million barrels over the past two reporting weeks to 46.08 million barrels, US Energy Information Administration data showed Wednesday.
"Cushing is at its lowest level this year," Smith said. "People are trying to get ahead of it and they are expecting this trend to continue. WTI's favor-ability is back with a vengeance."
The prompt supply tightness could be seen in the widening NYMEX backwardation. As a result, less volatility has been seen in Brent/WTI out along the curve. While the September Brent/WTI spread has tightened roughly $3.50/b from $4.61/b on July 1, the December 2014 spread has narrowed just 32 cents/b to $7.44/b.
Infrastructure has also been key to the shrinking spread, Smith said, with pipeline capacities expanding and new projects moving ahead, which could further draw on Cushing stocks.
The start-up of new pipelines from West Texas to Houston, including Magellan's Longhorn pipeline system and Sunoco's Permian Express Phase 1, will draw crude away from the Midland to Cushing route and redirect volume to Houston, Macquarie Capital analyst Vikas Dwivedi said.
"This effective drawdown of Cushing stocks will continue as the Longhorn system ramps up to full rates approaching 200,000 barrels a day by 4Q13," Dwivedi said in a research note. UPGRADER OUTAGES
NYMEX August and September crude contracts both hit 16-month highs Thursday at $108.04/b and $107.84/b, respectively, as the Dow Jones Industrial Average and S&P 500 Index both hit record levels on favorable economic data.
"WTI has been on a rip over the last two weeks moving from $97 to $107," Smith said. "It has broken through key resistance levels and is now looking to test last year's high of $110."
The strength in WTI has also been driven by the start-up of the new crude unit at the BP Whiting refinery and the outage of Canadian upgraders, which has limited Syncrude production over the last few months.
"This new [BP] unit will eventually run heavier crude but is currently running a lighter slate until the refinery's new coker starts in late 2013," Dwivedi said.
High US refinery runs has increased demand for crude, driven by strong refinery margins. US crude inputs at 16.237 million b/d the week ending July 12 were 787,000 b/d above the five-year average, EIA data showed.
Higher US crude prices have eaten into margins in recent weeks, but margins are still strong enough to warrant continued high refinery runs.
The WTI cracking margin in the Midwest, for instance, closed at $12.18/b Wednesday, according to Platts data. That was down from $38.58/b on June 10, but above the Northwest European Brent cracking margin of $4.22/b.
Platts margins reflect the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.
GULF COAST MARGINS
Margins on the US Gulf Coast are strong as well, even considering the roughly $4/b cost of delivering WTI from Cushing. The WTI cracking margin closed at $9.99/b Wednesday, Platts data showed, while the Light Louisiana Sweet margin closed at $9.97/b.
The tighter WTI/Brent spread has lifted margins for Brent-related crudes in the US Gulf Coast, which could signal the need for more imports. For instance, the WTI cracking margin was $2.33/b under the Nigerian Bonny Light cracking margin on the US Gulf Wednesday. The Bonny Light margin flipped to a premium to the WTI margin on July 1.
The tighter WTI/Brent spread has called into question the economic viability of moving crude by rail in the US. Bakken crude prices have risen along with WTI, for instance, while the cost of railing Bakken from North Dakota remains steep.
Delivered to the US Atlantic Coast, Bakken was $5.97/b over the cost of delivered Canadian Hibernia Wednesday, and $4.30/b over the cost of delivered Bonny Light.
Still, crack spreads on the USAC are healthy, with the delivered RBOB crack against delivered Bakken at $16.16/b Wednesday, and the RBOB crack against delivered Hibernia at $22.12/b.
