WTI/Brent arbitrage widens to record spread, over $6/barrel

London (Platts)--11Apr2007

The spread between front month NYMEX WTI crude and ICE Brent crude
widened to over $6/barrel Wednesday, to a record discount of the US crude
benchmark WTI to its European counterpart Brent.
Traders reported a sense of lost confidence in WTI, as May ICE Brent
futures traded at a record $6.16/b over the May NYMEX WTI contract.
"It's not that Brent and the US Gulf Coast are weak--it's more that WTI
is basically broken right now," one trader said.
A broker also added that, "the May WTI contract is not representative of
the market in the US, June is a little bit more like it. This is all to do
with the large stocks of crude in Cushing."
These thoughts were recently echoed in light of record increases in Saudi
crude prices for delivery into the NYMEX hub of Cushing in the US Midwest.
"Cushing has become an island of its own, and disconnected to actual
fundamentals prevailing in the US Gulf," a source told Platts when Saudi
Aramco increased prices for all its crudes bound for the US and loading in May
by $3.65/b last week.
This all comes ahead of the latest weekly US oil inventory data due to be
released at 1430 GMT by the US Energy Information Administration and American
Petroleum Institute.
Analysts polled by Platts are expecting to see yet another build in US
commercial crude stocks of 1.7 million barrels.
Jason Schenker, energy economist at Wachovia Bank, was looking for a
build in crude stocks as a result of imports holding the 10 million barrel
mark. However, since the beginning of 2007, US crude imports have been above
10 million b/d three times since low refiner demand due to an extensive
maintenance season has not warranted an influx of foreign barrels.
Last week, crude stocks in the US were pegged at 332.721 million barrels
and were 10.046 million barrels below year-ago levels, but 21.883 million
barrels above the five-year average. Stocks at the key pricing and delivery
point in Cushing, Oklahoma rose 2.8 million barrels to 26.7 million barrels,
just 53,000 barrels below the all-time high posted December 1.
The landlocked nature of the WTI contract has kept the local oversupply
very much within the PADD II (Midwest) region, as refineries have struggled
to keep pace with output, adding to the weakness.
"We've seen gasoline cracks spiking but a lot of refiners are not able to
take in crude due to turnarounds," said one trader in Europe. "The production
in West Texas is trapped in Cushing, and can't get out even when pipelines are
full or prorated, and when refineries are down for planned or unplanned
maintenance," the source said.
Traders said that the current weakness of WTI versus Brent and other
grades might not last too much longer. "What needs to happen is some pipelines
get reversed and that will take the pressure off," one said Tuesday.
Recent statements of possible intent to move the supply destination of
the Seaway pipelines from Cushing to the US Gulf have so far not amounted to a
reversal.