Oil spreads affecting producers’ decisions

A Stimulating Start

However, the coming weeks will test this resilience as new pipelines directly linking the Permian basin to coastal markets start up. But critically these pipelines are also taking oil to the Gulf Coast that would otherwise go to Cushing. Here we come back to the second group of producers, the Permian Basin firms, that will influence events at Cushing this summer. Again the netback logic must apply. Although it is cheaper by $2 to $4 to move oil to Cushing by pipeline than to the Gulf Coast, so long as Gulf Coast prices hold up it would be illogical to ship oil to Cushing when the Gulf Coast option is available.

With sufficient pipeline capacity on hand, the price of oil at the Gulf Coast will determine the limit for WTI. A trader holding crude at Cushing will always opt to move the oil to the Gulf Coast if the price at the delivery point less the cost of shipping exceeds the value of WTI at Cushing. The upshot is that so long as Gulf Coast pricing does not disconnect from the rest of the world, WTI can probably rise by more than $4 against Brent before inland prices get too high and choke off movements to the Coast. That's the bottom line to this equation. The arbitrage trade is not Brent-WTI, it is WTI-Gulf Coast. So while the marginal cost of moving oil between Cushing and the Gulf Coast may be $5 a barrel, that does not mean Brent has to be $5 above WTI. If the Gulf Coast is Brent +$2 then ultimately WTI could be Brent -$3. This spring has shown so far that delivered prices for light sweet crude on the Gulf Coast have remained remarkably resilient in the face of growing domestic supplies of crude. If that situation holds into the summer, traders who failed to buy WTI at today's discounts will not be happy. But by the same token buyers must beware. A new glut on the Gulf Coast would have devastating consequences for WTI and the emergence of a glut in Houston or St. James cannot yet be ruled out. The last two years have been full of false dawns dashed by the market's sudden reaction to oversupply.

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About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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