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A Tale of Crudes: Anybody Got A Big Rig?
By Dian L. Chu, EconForecat 
On Wednesday, Feb. 16 Israel said Iran is sending two warships into the Suez Canal on way to Syria, and that the action is considered a “provocation.” Due to the long history of bad blood between Israel and Iran, this very possible scenario was enough to even send the bear-infested NYMEX crude oil futures volume surging midday.
West Texas Intermediate (WTI) on Nymex rose to just below $85, while Brent crude on the ICE futures exchange spiked $2.17 higher to $103.81 a barrel--a 29-month high--widening the WTI-Brent spread to a new record near $19.
High Middle East Tension
Then on Friday, Feb. 18, AFP reported that permission has been granted for Iranian warships to transit the Suez Canal into the Mediterranean. Canal officials say it would be the first time Iranian warships have made the passage since the 1979 Islamic revolution, while Israel has labeled the Iranian action as "hostile' and said Israel was closely monitoring the situation.
As the worst Israel-Iran conflict scenario failed to materialize, at the close Friday Feb. 18, Brent crude oil for April settled at $102.79 while WTI for April delivery rose to $89.71, narrowing the spread to $13.11.
Crude Glut at Cushing, OK
Since WTI is lighter and sweeter crude which requires less processing, it has historically enjoyed a $1 – $2 a barrel price premium to Brent crude oil. According to Bloomberg, the WTI-Brent gap averaged only 76 cents last year.
However, WTI’s premium disappeared about a year ago and in recent days it has been trading at more than a $10/bbl discount to Brent mainly due to rising inventory levels at Cushing OK, the delivery and price settling point of Nymex crude futures (See Chart). ??
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Source: Bianco Research via The Absurd Report
WTI Undervalued by $12 Energy research and consultancy firm John S. Herold noted that from a historical point of view, the Brent premium was often short-lived. Since the U.S. economy is growing more rapidly than those of most European countries, Herold believes WTI may be undervalued by $12 per barrel as compared to Brent. WTI Premium May Never Return Meanwhile, Deutsche Bank thinks the historical WTI premium to Brent may never return and that Brent premium seems to have shifted to a level of $2 to $3 a barrel from the typical historical discount of $1 to $2 a barrel. For now, between the two oil markers, Brent seems to have the pricing momentum since it is undersupplied, and more likely to be jolted by the geopolitical unrest in MENA (Middle East and North Africa) due to Europe’s close proximity to the region, and the end markets Brent serves. Cushing Logistic Fix by 2014 The problem with Cushing is that The U.S. oil infrastructure is built around the country being an oil importer with pipelines mostly flowing from the coast to inland. Many analysts don’t see infrastructure could improve at Cushing any time soon to move crude to the coast and world markets, while oil production from Canada and U.S. oil shales like the Bakken play in N. Dakota are set to rise adding to the glut. Credit Suisse, for example, sees it will most likely be 2013 or 2014 before the pipeline infrastructure could improve the situation at Cushing. Beneficiaries - Gulf Coast Crudes When Brent is higher than WTI, it also drives up the price of low-sulfur U.S. grades that compete with international oils priced against Brent. The recent spike in Brent has sent the premiums for the Gulf Coast Grades--Light Louisiana Sweet (LLS) and Heavy Louisiana Sweet (HLS) crudes--to the highest levels (above $20) against WTI since at least 1991. Among producers, the largest beneficiaries of this Brent premium include Canada's Nexen Inc. (NXY) and Talisman Energy Inc. (TLM), and U.S.-based Apache Corp. (APA). Product Prices Trend With Brent Meanwhile, with the growing disassociation of the WTI to global markets, the domestic petroleum product prices, particularly distillates, have pretty much ignored WTI and are trending more with Brent. The chart below illustrates this trend where United States Brent Oil Fund (BNO), an ETF, was used as a proximate for ICE Brent.
Beneficiaries - Midwest Refiners Inland crude in the U.S. is getting cheaper, while petroleum product prices are trending with the higher-priced Brent. Theoretically, this means higher crack spread for refiners, but not all U.S. refineries can get crude at the low WTI benchmark price. WSJ quoted Valero (VLO) that logistical restraints at Cushing have limited Valero to only about 300,000 barrels of WTI a day.
So, only a few Midwest refiners (PADD 2, where Cushing is) with access to Cushing are able to take advantage of this WTI pricing anomaly. Delek US Holdings Inc. (DK), Frontier Oil (FTO), Holly Corp. (HOC), Western Refining (WNR) and Valero (VLO) are among the lucky ones that could see higher earnings in coming quarters. Anybody Got A Big Rig? Bloomberg quoted Raymond James that producers can ship crude via rail to the Gulf Coast for about $4 to $6 a barrel and by truck for between $8 and $10 a barrel. Many market players reportedly are using rail and truck shipments to move the glut out of the Cushing to the Gulf Coast where the same barrel of oil would trade at much higher in recent days (see chart below).
However, the economics of these alternative transportation modes--trucks in particular--would only work if the spreads stay elevated at the current levels. According to Bloomberg, the WTI-Brent spread between the June contracts already dropped to $9.41 from $11.35 on Feb. 16. And capacity limit of these alternative transports will be another factor. ConocoPhillips already said it isn’t interested in reversing the Seaway pipeline that brings crude from the U.S. Gulf Coast to Cushing, Ok. So, with Cushing storage near 39 million barrels, barging, rail, trucking, and possibly some pipelines reverse flows may help ease the bottleneck at Cushing and narrow the WTI-Brent spread, but they are unlikely to significantly improve the WTI predicament in the next 18 months or so.
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Good read.
Gail at the Oil Drum posted a much more in-depth article on Midwest PADD2 production and refining issues dealing with pipeline constraints, Canadian imports, increased Shale oil production from the Bakkens and of course refining capacity (refineries are designed to process specific types of crude, so this complicates things, pipe line constraints become critical, and our oil pipelines are getting very old and prone to leaks, thus lower pressures and lower flow rates).... breaks down and explains the pricing difference between WTI and Brent with these considerations being qualified.
For those who want to understand the minutia of this issue. And of course the comments that follow on TOD are as good a read as those on ZH... (well maybe a little tamer).
http://www.theoildrum.com/node/7519#more
silver bells, silver bells, jingle all the way...oh what fun it is to ride in a one horse contango sleigh.
Because the spread is so wide there is no Foreign crude even making its way to the gulf coast. The gulf remember is where 50% of the refining capacity is for the US. They are the ones that are having to pay high prices for the grades that look like WTI.
CNBC did a great job of mis-reporting the problem during the Egypt unrest, telling the sheep that a good way to play oil was to own the Oil ETF ( disaster as it has to roll in deep contango every month) or just buy spot futures. Which was great as it was just in time for its expiry. Would not be surprised to see March April crude trade +$5 next week (was $2.60 Friday morning) then take April May up as well as March goes off the board Weds.
Beats working.
Taking my winnings to use to take delivery of Silver off of Comex before that runs out. Gotta love it the most widely used commodity (crude) in deep contango the second most widely used commodity (silver) in backwardation. Christmas is February.
I typically don't like ETFs that's futures based due to the rolling effect in a contango market, which applies to almost all commodities now. More detail in my post here - Commodities: Time To Go Long and Physical.
I was glad to hear Dennis Gartman actually tell the truth about the contango problem and the oil ETF. People need to do their homework with the ETFs and ETNs to not get screwed.
Loving the silver trade. Been buying physical for years, jr miners, even long SLW for a quick 20% gain.
Thanks for your excellent work.
WTI will follow the trend upward like it always has.
Those who say,"Things are diffent now" sound like my realtor.
Why isn't the oil on the Gulf coast just being loaded on to tankers and sent to Europe before it even gets into the pipelines to Cushing?
WTI stockpiles at Cushing at $12 discount to Brent may start to look very sweet with the contagion of social unrest spreading like wildfire throughout the ME.......
For the record; short the Euro from 1.3700 on the election result out of Hamburg.........Money's too tight to mention.
I posted this on the German election thread, but it is worth repeating...
This election had very little to do with the European Bailouts. Hamburg is unusual in that it is a City that has the status of a state (owing to it's origins as a Free city of the Hanseatic League), and this was much more about the local CDU party being in chaos following the recent resignation of the former mayor.
"While the SPD was quick to claim a springtime for Social Democracy, independent commentators concurred that the vote was not typical for Germany, but was local, reflecting Hamburg voters' scepticism about Ahlhaus, a new mayor only five months in office.
Forschungsgruppe Wahlen, a polling company, said 82 per cent of Hamburg voters told it they had voted on local issues, not national ones, with lack of confidence in the state CDU a key motive to switch to the SPD."
http://www.monstersandcritics.com/news/europe/news/article_1620704.php/S...
The other amusing thing is that the CDU party brought in zu Guttenberg, the Defence Minister, as a popular big gun from Berlin to rally support - I've been in Hamburg recently and his ugly mug is plastered all over the place. He's been embroiled in a scandal around is PhD thesis, which appears to have large chunks taken from other people's works, hence the moniker, Baron Cut and Paste. Germans take qualifications very very seriously, so I think this played a part.
http://www.bbc.co.uk/news/world-europe-12504356
But, there is no doubt, this is a crushing loss.
Thanks for that insight re the German elections A Man.........interesting post. Did place a stop at 1.3755 on that EUR/USD short.......looks like a possible 1.3650 to 1.3550 to the downside so decent risk/reward, or if it breaks higher > 1.3745/55 area then maybe 1.3850 again.