Oil in 2014: Reining in WTI/Brent spread

Source: Bloomberg Source: Bloomberg

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After a strong round of profit-taking selling over the last two trading sessions of the year, the oil complex is starting 2014 in negative territory once again. Heading into 2014, the oil complex will continue to focus on the ongoing geopolitical issues in the MENA region that have resulted in a significant amount of oil flow shut-ins. On the other hand market participants will also focus on the robust crude oil supply situation in the U.S., but possibly offset by what could be a growth year in U.S. oil consumption as the economy continues to improve.

The Brent/WTI spread was relatively flat over the last week or so in light holiday trading activity. The spread ended the year very near the $12/bbl technical support level but has now breached this level in early trading. Overall the spread narrowed by almost 36% in 2013 or $6.90/bbl. The spread has been in a major transition toward a more normal historical relationship between Brent and WTI (NYMEX:CLG14) as the take away capacity out of Cushing, Okla. gradually increases.

The market is continuing to evaluate the implications of significant addition to takeaway capacity out of Cushing that will come on-stream during the first quarter of 2014. The main concern is if the surplus of crude oil that has been plaguing the Cushing area for several years will simply move to the Gulf Coast and thus still have a negative impact on the Brent/WTI spread as well as the local crude differentials like LLS.

Last week Cushing inventories declined for the third week in row with total crude oil stocks in the US also declining for the fourth week in a row. PADD 3 crude oil stocks have also declined for the last five weeks with the total crude oil stock level in the Gulf down by about 18.2 million barrels (basis the latest EIA inventory report) and at the lowest level since the middle of August. So far the inventory destocking pattern in the Gulf coast does not suggest that a surplus is building in this region.

With Cushing takeaway capacity expected to increase significantly over the next two months the market will continue to look closely to see if the current destocking pattern in the Gulf is reversed. For now with refinery runs in PADD 3 at the 95.6% utilization rate, the current destocking pattern should continue for the near future. The combination of Cushing and PADD 3 crude oil stocks declining the February Brent/WTI spread is likely to settle into the $10.50 to $12/bbl trading range in the next week or so.

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