Bloomberg News

Brent-WTI Oil Gap Sliding as North Sea Output Rebounds

September 12, 2012

Brent-WTI Gap Sliding as North Sea Output Jumps

Oil pipelines feed into storage tanks at the Enbridge Inc. Cushing Terminal in Cushing, Oklahoma. The logjam of oil in the U.S. is easing after Enbridge Inc. and Enterprise Products Partners LP reversed flows on the Seaway pipeline May 19, carrying supplies from the Midwest to the Gulf Coast refining hub. Photographer: Shane Bevel/Bloomberg

The difference between the world’s two most-traded grades of oil is narrowing as North Sea production rebounds from the lowest level in five years.

Brent crude on the ICE Futures Europe exchange in London cost $18.95 a barrel more than West Texas Intermediate on the New York Mercantile Exchange. That’s down from $21.92 on Aug. 15, the most in almost 10 months. Daily exports of the four crude grades comprising the Dated Brent benchmark will rise 24 percent in October, the biggest monthly increase in two years, as offshore maintenance work ends, according to data compiled by Bloomberg.

“It is when we fully exit maintenance in the North Sea that the impact of additional barrels will be felt,” Harry Tchilinguirian, BNP Paribas SA’s head of commodity-markets strategy in London, said in an interview yesterday. “The market tends to look at the difference in price between these two crudes as it tends to guide arbitrage activity across the Atlantic.”

The recovery in North Sea supply is combining with a slew of refinery repairs that are sapping demand for Brent just as new rail links and pipelines are cutting a glut of WTI stored in the U.S. Midwest. Goldman Sachs Group Inc. has stuck this year to a forecast that the difference between the two grades, the most-traded spread on energy exchanges, will shrink to $5 a barrel. BNP says it may drop to between $13 and $14 after staying at $20 until the maintenance period ends.

Loading Programs

Exports of Brent, Forties, Oseberg and Ekofisk crudes, or BFOE, the four grades used to price Dated Brent, will average 890,323 barrels a day in October, according to loading programs obtained by Bloomberg. That compares with 720,000 barrels a day in September, the lowest since Bloomberg began compiling the schedules in 2007. At the same time, more than 1.1 million barrels a day of European refining capacity will be halted for maintenance in October, up from 650,000 barrels this month, according to Vienna-based JBC Energy GmbH.

Brent traded on ICE closed at a record $27.88 a barrel more than WTI on the Nymex on Oct. 14 last year. The average during the past five years is $5.30.

ICE’s Brent-WTI contract is the most popular of those offered by the exchange for any two commodities. Some 28,199 lots changed hands yesterday. Trading spreads allows participants to place wagers without buying the outright futures themselves.

Seaway Pipeline

Loadings of Forties, which typically account for more than 40 percent of total BFOE exports, will rise to 329,032 barrels a day, up from 180,000 barrels a day this month, the lowest level in at least five years, programs obtained by Bloomberg showed.

That will follow the completion of scheduled maintenance at the 200,000 barrel-a-day Buzzard oil field, the biggest contributor to the Forties blend. Nexen Inc. (NXY) said it halted Buzzard on Sept. 4 for repairs that were anticipated to last until the middle of October.

The logjam of oil in the U.S. is easing after Enbridge Inc. and Enterprise Products Partners LP reversed flows on the Seaway pipeline May 19, carrying supplies from the Midwest to the Gulf Coast refining hub. The link, transporting as much as 150,000 barrels a day from Cushing in Oklahoma, the delivery point for WTI, is scheduled to pump as much as 400,000 barrels a day early next year.

About 300,000 barrels a day of Bakken shale oil is being shipped from North Dakota by rail, Al Monaco, Enbridge’s president, said July 11 in Calgary. Some rail deliveries of Bakken are reaching Texas and Louisiana, according to Lee Klaskow, a Skillman, New Jersey-based analyst for Bloomberg Industries Research.

‘Latest in Surge’

Tesoro Corp. (TSO:US) received the first unit-train of Bakken crude Sept. 4 at a new offloading terminal that will allow the company’s Anacortes refinery in Washington state to receive as much as 50,000 barrels a day by rail, Tina Barbee, a company spokeswoman in San Antonio, said by e-mail on Sept. 5.

“This is only the latest in a surge in rail unloading capacity that is likely adding more than 200,000 barrels a day of rail-unloading capacity in the third quarter of 2012,” David Greely, a New York-based analyst at Goldman Sachs, said in an e- mailed report yesterday. There will “shortly be enough rail capacity” for both loading and unloading to move all of North Dakota’s crude production, he said.

Supplies of Canadian crude that can be sent to the U.S. have been hampered by planned maintenance to upgrader units that process heavy bitumen from Alberta’s oil sands deposits into lighter crude. Suncor Energy Inc. (SU) started six weeks of repairs at the Fort McMurray upgrader complex earlier this month, while Canadian Natural Resources Ltd. is conducting work at its Alberta plant this quarter.

Four-Month High

Bakken crude prices rose to a four-month high of $103.04 a barrel on Sept. 10, while syncrude, a synthetic oil upgraded from tar-like bitumen in Alberta into refinery-ready crude, jumped to $112.04 a barrel, the highest since July 26, 2011, according to data compiled by Bloomberg. By comparison, WTI for October delivery in New York settled yesterday at $97.17 and traded as high as $98.06 today.

“We expect that Bakken and Canadian crude oil will need to continue to flow to Cushing in the fourth quarter 2012, and WTI prices will need to rise back above Canadian and Bakken prices in order to motivate these flows,” Greely wrote in the report. “At current Bakken prices, this would imply that WTI prices could rise nearly $10 a barrel to $107 a barrel.”

Supertanker Bookings

An unprecedented flow of North Sea oil was shipped to South Korea in the first half of this year after the European Union signed a free-trade accord in July 2011 with the Asian nation. That may resume should Brent prices become cheaper again.

A weaker Brent market will “certainly make Forties more attractive incrementally to South Korea or other Asians,” Seth Kleinman, head of energy research at Citigroup Inc. in London, said by e-mail on Sept. 7.

A total of 38 million barrels of North Sea crude has been shipped to South Korea since December, vessel reports and ship- tracking data from IHS Inc. show. Typically two or three very large crude carriers sail every month from January and July, and since August none has been booked for this voyage. A VLCC carries about 2 million barrels of crude. The FTA exempted the nation’s refiners from a 3 percent import tax on EU products.

“We have been importing North Sea crude by assessing economics and facility-related composition matters,” said Yoo Jung Min, a Seoul-based spokesman at SK Innovation Co., which owns South Korea’s biggest oil refiner, by phone yesterday. “When adjusting sources of suppliers, we will closely consider various elements, including economics.”

The eastbound flow slowed down because of planned maintenance for a VLCC jetty at Hound Point, the loading terminal for Forties in Scotland, and as the price of the crude advanced. The grade averaged a premium of 26 cents a barrel to Dated Brent in August and was at minus 22 cents yesterday.

“We will start to see some VLCCs to South Korea more than offset an increase of supply in Europe,” Olivier Jakob, managing director of research group Petromatrix GmbH, said on Sept. 7 by phone from Zug, Switzerland.

To contact the reporter on this story: Sherry Su in London at lsu23@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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