The spread between WTI and Brent is out of whack again. But given what's going on in the market, it doesn't seem quite that odd.
Traditionally, Brent is valued lower than WTI. That makes sense for many reasons: the US is a large net importer of crude, and prices in the US need to be high enough to attract imports. If WTI consistently runs at levels lower than Brent, and the price of much of the world's crude supply is based on Brent, imports will slow considerably. But as that happens, the price of Brent-related crudes in the rest of the world will be pushed down as their supply is diverted away from the US, and Brent should return to its normal place at a level below WTI.
Two years ago, a major refinery problem at a Valero plant in Texas created an enormous backlog of crude at the WTI delivery point of Cushing, Oklahoma. WTI crude coming in from Canada and the midcontinent of the US built up as a result, and WTI was pushed well below Brent. The inability to transport WTI out of Cushing to the Gulf Coast helped contribute to this buildup, and it raised -- anew -- questions about WTI's role as a benchmark, given the land-locked nature of Cushing.
WTI is well below Brent again, if you look at something as simple as the February Brent-WTI spread. The spread ended trading Wednesday at close to $3 in favor of Brent.
But this time, an argument can be made that WTI is accurately reflecting what is going on in the world of crude, and Brent is slower to react. In an oversupplied market, a commodity will tend to move toward the market of last resort, where it can always be sold. That's evident in this week's US import numbers: US crude imports jumped 1.236 million b/d to 10.485 million b/d -- the highest level in six weeks -- contributing to the 6.7-million-barrel increase in total US crude inventories.
As long as storage is available at Cushing -- and given the steep rise in inventories reported by the Energy Information Administration today, storage clearly has been available -- excess oil will go to where it is easiest to take advantage of the contango structure in the market. The eye-popping contango of almost $13/b between February and August WTI is a direct result of the overhang of oil on the market, and the fact that there was available storage at least through last week brought the world's excess oil overhang.
And storage is not full. According to Platts' Linda Rafield, maximum storage capacity in Cushing is about 42.4
million barrels, but only about 80%, or roughly 34 million barrels, of that is operable storage space. With 32.182 million barrels now sitting in Cushing, the market appears poised to test the limits of storage capacity there.
So it's WTI that's reflecting what is going on in the world: the collapse in demand, oversupply and a resulting enormous contango that is encouraging storage. On this one, WTI is ahead of the curve, not behind. The sort of buy now, sell later and store for the duration can't be transacted as quickly with a waterborne crude, and the fact that Brent hasn't fallen below WTI is a sign of that. Also, with the US swimming in inventory, its need for imports is declining, so the premium that WTI needs to carry over Brent to encourage those imports is reduced.
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