WTI crude nears Brent valuation as US oil demand accelerates

Through Sheela Tobben and Alex Longley to 06/18/2021

Hess’ crew in the Permian Basin

(Bloomberg) – The US oil market is reaching a critical point.

Every week, drivers drive billions of kilometers on highways, as they did in 2019, before the pandemic ravaged global oil consumption. But despite a steady increase in demand in recent months, West Texas Wildcats are no longer launching rigs like before, with production still down 15% from last year’s peak.

This dynamic pushes the prices of US crude up. It even raises the possibility that, for the first time in five years, West Texas Intermediate oil could end up neck and neck with global benchmark Brent.

Just 18 months ago this would have been unthinkable, but the fact that it is even peripheral vision now underscores the transformation the oil market went through during the pandemic. This decision should already have ramifications for American exports. As shale drillers do not break their vows for capital discipline and the world’s largest economy leads the West to reopen, American refiners are clamoring for more barrels in the country, rather than seeing them leave for the West. ‘export.

“It’s a function of accelerating US demand,” said Michael Tran, analyst at RBC Capital Markets, who says WTI has an outside chance of reaching parity with Brent, but it is not its base case. “The market realizes that the WTI must raise its prices to stifle exports and encourage imports, otherwise the regional balances will become too tight by the summer.”

Refineries across the United States are operating at their highest levels since before the pandemic, as demand returns with most of the economy open again. Cushing’s most dependent Midwestern fuel manufacturing plants are processing crude at the highest rate since September 2019, adding further support to WTI.

The discipline of shale zone capital coupled with increased domestic demand was instrumental in reducing inventories in Cushing, Oklahoma, the delivery point of the Nymex WTI futures contract. Seasonal stocks in Cushing are at their lowest for three years.

The result is an increasing offset in the US oil futures market where oil for quick delivery is more expensive than future contracts. This prompts traders to sell their barrels now rather than keeping them for later.

“This is a sure sign of the tightening of the US crude market,” said Eugene Lindell, analyst at consultant JBC Energy GmbH.

Due to the lower production, there is currently more pipeline space available. This has prompted some operators to reduce their transport costs to increase their turnover. One example is Centurion Pipeline LP and Energy Transfer LP who are charging less than $ 1 a barrel to get supplies over their joint system this month from Cushing to Nederland, TX on the Gulf Coast. With cheaper pipeline costs to the region, the WTI-Brent gap does not need to be that wide to support crude exports

The relative enthusiasm for WTI is also evident where traders deploy their money. Total open interest on all WTI contracts topped monthly Brent futures for the first time since 2018 last month. WTI open interest is up around 15% this year, while Brent is only up 1%.

WTI is expected to further close its gap against Brent, but the prospect of reaching parity may be limited. On the one hand, the slowdown in production in the US shale areas is seen as temporary, especially given the recent rally in prices where Nymex futures have risen by almost 50%.

The first signs of a return to production may already appear. A weekly government report showed that national production increased last week by 200,000 barrels per day to reach its highest level in more than a year.

“US oil production will be considerably higher by the end of this year, 400,000 barrels a day more, and a little higher next year,” said Ed Morse, global head of research, by phone. raw materials at Citigroup.

And while that may narrow the gap in the long run, Morse says that high levels of US demand right now mean the WTI-Brent gap could still narrow a bit further.

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Felix J. Dixon