As the Cushing overhang continues to recede it has a direct impact on the pricing relationship between Brent and WTI. The following chart shows the current path of the spot Brent/WTI spread compared to its current five-year average as well as the average trading level during the pre-surplus five-year average for the period 2004 through 2009. Over the 2004 through 2009 period the Brent/WTI spread averaged a $0.79/bbl. discount of Brent below WTI. As of this writing the spot spread is trading around a $4/bbl. premium of Brent over WTI and has been in narrowing trend for most of the year as it works its way back toward the pre-surplus trading level.
Several factors continue to support my view of the spread returning to a more normal historical trading relationship (what I refer to as the 2004-2009 average). The main drivers keeping the spread in a narrowing pattern are:
The WTI forward curve still in a relatively steep backwardation while Brent is starting to move into a slight contango in the front end of the curve.
The outflow capacity out of Cushing is continuing to increase as the Keystone Gulf Coast pipeline works its way to its design capacity while the Seaway Twin pipeline readies for start-up toward the second half of May or early June.
Global oil demand seems to be easing especially in China and Europe which will impact the Brent side of the spread.