Thursday, 17 April 2014

Brent-WTI convergence is puzzling: Commerzbank

Otmane El Rhazi, Thursday 17 April: 

The prices of West Texas Intermediate (WTI) and Brent crude oil continue to be supported by tensions in Eastern Ukraine. Data released yesterday showed that US Crude Oil Inventories rose by 10 million barrels last week, surpassing estimates for an increase of 1.3 million barrels, following the prior gain of 4.0 million barrels. As a result, total US crude oil inventories are now higher than a year ago (see Graph 1).

Meanwhile, inventories at Cushing have dropped by 12.7 million barrels since the start of February and are 45 percent lower than the same time last year (see graph 2). What’s more, crude oil stocks at the hub are now at their lowest level since October 2009. “The upshot of the surge in delivery from Cushing has been higher inventory levels across the US Gulf coast and expanding refined oil exports”, according to commodity strategists at ANZ. They emphasize that “the increase in US distillate exports has a direct impact on WTI’s competiveness with Brent, with more US oil in the global system narrowing the arbitrage between benchmarks to a two year-low of less than USD 4/bbl”.

But analysts at Commerzbank believe “the reasons for the recent price hike in WTI and its convergence with the Brent oil price are puzzling”. They expect Brent’s premium over WTI to “widen in the medium term, partly due to the crisis in Ukraine” and because the US crude oil market is “at risk of ‘spilling over’”.

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