London overtakes New York as Brent Oil beats WTI

Trend underlines London’s resilience

Seaway Saga

A reversal of the Seaway pipeline by Enbridge Inc. and Enterprise Products Partners LP allowed more oil to be pumped out of Cushing to the Gulf Coast on May 19. The 500-mile (805- kilometer), 30-inch line will initially be able to deliver 150,000 barrels a day, rising to more than 400,000 in the first quarter of 2013, the companies said in a June 18 statement.

“With the reversal of the Seaway pipeline, and the exploding growth of transportation of oil over rail, Nymex WTI is now flowing from Cushing to the refiners along the U.S. Gulf Coast, re-establishing the correlation between WTI and waterborne crudes,” the CME said.

For all Brent’s accessibility, maintenance at North Sea oil fields and pipelines can curb supplies. Work this summer may push prices for the earliest-delivery futures higher this September and October, according to Olivier Jakob, managing director of Petromatrix GmbH, a researcher in Zug, Switzerland.

North Sea Declines

Combined oil production from the U.K. and Norway was 3.1 million barrels a day in 2011, 47 percent less than 10 years earlier, according to statistical data compiled by BP Plc.

Shipments of Brent, Forties, Oseberg and Ekofisk grades which make up the North Sea benchmark known as BFOE, will be 774,194 barrels a day this month, the fewest in five years and 49 percent less than the record high of 1.53 million barrels a day in October 2007, according to data compiled by Bloomberg.

Chinese state-run Cnooc Ltd. said last month it plans to acquire Canadian energy producer Nexen Inc., a move that would give it control of Buzzard, the U.K.’s largest oil field and the biggest contributor to the Forties stream. Intercontinental Exchange CEO Jeff Sprecher said on an earnings conference call yesterday that new investment by China would assist the “longevity of future oil production from the North Sea.”

Backwardation, Contango

Brent’s appeal to investors has also risen because of the premium, or backwardation, of near-term futures relative to later supplies. That gives traders a profit as they roll over their front-month holdings before expiry into later contracts. Brent was in backwardation for all but two weeks this year and for most of 2011.

WTI futures typically traded in the reverse structure, or contango, since 2008, which results in a loss as investors sell front-monthfutures and buy deferred contracts.

If an investor took a long position, or bet that Brent prices would rise, in January 2005 and rolled the contracts a day before expiry, he would have earned $1.87 for every dollar invested at the close on July 26 this year, according to PVM calculations. A WTI position over the same period would have gained 58 cents for every dollar invested, PVM said.

“The greater tendency of Brent to go into backwardation facilitates long-only positions which tend to be the ones the hedge funds go for,” David Wech, head of research at JBC Energy GmbH in Vienna, said in an e-mailed response to questions. “Rolling-over in a contango market is simply costly.”

Bloomberg News

--With assistance by Matthew Leising in New York and Edward Evans in London. Editors: Raj Rajendran, Stephen Voss

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