WTI Falls Relative to Brent, Is Shale Oil the Culprit?
According to data from the U.S. Energy Information Administration, U.S. crude oil inventories rose by 5.2 million barrels last week, the fifth largest build of the year, with stocks at the Cushing hub rising for the second week in a row. Over the past four weeks, inventories have risen by 22 million barrels, marking the biggest four-week build since April 2012 and the second largest since February 2009.
The crude oil stored at Cushing, the delivery point for the U.S. futures benchmark contract, amounted to 33.34 million barrels in the week that ended Oct. 18, an increase of 358,000 barrels. As noted in an article in the FT, certainly flows of shale oil have been surging from areas such as Bakken, North Dakota and Eagle Ford, Texas, where output has reached 1 million barrels a day.
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As a result, prices have fallen to their lowest level since July. On Wednesday, NYMEX West Texas Intermediate dropped more than $2 to a low of $96.16 a barrel, before recovering slightly. The decline saw the price differential between WTI and global benchmark Brent increase to more than $13 – the widest since April – before narrowing. ICE Brent for December delivery was down $1.75, to $108.21 a barrel.
Is this the oil market following the natural gas market with a widening differential between domestic and global prices? It would be nice to think so, but no, oil either in crude form or as refined products is much more readily exported than natural gas. As such, US prices will move in tandem, if not at the same level, as global oil prices.
Inventory increase has caught the market by surprise
Analysts had expected a rise of roughly 2.9 million barrels, as planned maintenance at refiners reduced crude demand. The FT quoted the EIA as saying that refinery runs were 14 million barrels a day in the week ending Oct. 18. Plants had operated at 85.9% of capacity, compared to June and July, when runs were above 16 million barrels per day.
However, with maintenance schedules winding down and lower prices encouraging refiners to stock up to meet export demand, expect the differential between WTI and Brent to narrow. As Brent is constrained by reduced Libyan and Nigerian shipments, it seems more likely for WTI to rise than for Brent to fall. So make hay while the sun shines and for purchasing that is tied to spot WTI numbers consider taking current lower price levels as they are not expected to prevail for long.
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