WTI/Brent finding common ground

The most significant event in the oil complex over the last twenty-four hours has been the further deterioration in the Brent/WTI spread. In the last twenty-four hours the spread narrowed by another 22% or more than $1/bbl. In spite of the first weekly build in Cushing crude oil stocks in months the spread still narrowed on the potential of the return of Libyan crude oil, a slight calming in the Ukraine and disappointing export and crude oil import data out of China.

As I have been forecasting for months the spread is on the road toward normalcy or to the trading level that was in play prior to the Cushing surplus build-up. The following two charts continue to highlight what has been happening. The first chart shows current Cushing crude oil inventory data compared to its five-year average as well as the highest and lowest levels hit during the last five years for each individual week. In addition I have included what I call the pre-surplus five-year average for the period 2004 through 2009. This average inventory level was approximately 21.7 million barrels over the aforementioned period.

As shown on the chart crude oil stocks in Cushing have been declining (except for this week) at an accelerated rate for the vast majority of this year with the level still well below the current five-year average as well as the minimum level over the last five years for the same week. Inventories are heading toward the so called normal pre-surplus level as the industry moves stocks to normal operating levels required by the refining and logistics sectors.

Crude oil stocks are now only about 5.9 million barrels above the pre-surplus inventory average. With the WTI (NYMEX:CLK14) forward curve still in a relatively steep backwardation the rate of destocking in Cushing is likely to continue at the rate of decline it has been running at over the last few months. If so, current inventory levels should hit the pre-surplus level within the next several months.

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