By Walter Kurtz, Sober Look
The Brent-WTI crude
Brent is in backwardation, while WTI is in contango. Backwardation generally means tighter supply (more demand for the spot product) – a bullish indicator, while contango tends to indicate the opposite. It says that the crude market in the US (particularly in Cushing, OK) is well supplied, which is not the case with Brent (at least not nearly as much).
|Brent and WTI futures curves|
There is talk however that the gap between these two curves will close fairly soon (ht John A).
Bloomberg/BW: – The energy guys at Goldman Sachs, led by analyst David Greely, think that by the end of 2012 the price of WTI will be just $5 below Brent, largely because new pipeline projects, such as the recently reversed Seaway, will allow more domestic crude to reach refineries along the Gulf Coast, making WTI more valuable. In essence, the more domestic crude that reaches the Gulf Coast, the stronger the floor beneath the price of WTI becomes.
Some people doubt Goldman’s forecast however. If traders truly believed in this rapid convergence, the two curves above would be approaching $5 spread six months out. Instead the difference in the January 2013 contracts is above $11.Analysts instead are looking at brisk US crude production that has been on the rise this year (we had signs of that increase earlier in the year).
|US crude oil production (thousands of barrels per day; source EIA)|
It means that in spite of the reversed Seaway pipeline that is delivering US crude to the Gulf Coast (to the large US refineries), there is still not enough pipeline capacity to accommodate this increased production, putting downward pressure on WTI.
Bloomberg/BW: – “Five dollars is not likely,” says Fadel Gheit, an analyst at Oppenheimer. “And even if it does go to $5, it’s not going to stay there.” Gheit points out that as long as WTI stays above $70, drilling companies can still make money producing new wells, which in turn, he says, will keep WTI anywhere from $8 to $12 below the price of Brent.