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The Crude Oil Futures Market Structure

Source: OPEC 3/3/2013, Location: Europe

Although remaining in contango for the entire month of January, the Nymex WTI market structure in January was at a much narrower range, supported by stronger prompt values of the WTI market. The main factor behind this narrowing trend was the 400,000 b/d Seaway pipeline link which is helping to overcome the bottleneck problem at the landlocked Nymex WTI delivery point in Cushing, Oklahoma, where stocks are currently at record highs. In January, the first month versus second month time spread came down on average to around 30/b, compared to about 55/b in the previous month. It would have narrowed further if flows had not been cut due to elevated storage levels at the Jones Creek terminal in Texas. In contrast, the ICE Brent market structure further widened its backwardation supported by North Sea production issues, as well as continued arbitrage of the benchmark-setting grade Forties to South Korea. The spread between the second and the first month of the ICE Brent contract averaged around $1.15/b in January, the highest in four months, compared to $1/b in the previous month.

The Brent-WTI spread recently narrowed in anticipation that an expanded Seaway pipeline moving crude oil from the US Midwest to the USGC will ease the glut of crude in the US Midwest especially at the Cushing, Oklahoma, delivery point for the US oil futures contract that has been weighing on US crude futures prices. However, the spread rebounded slightly as storage and handling capacity at the Jones Creek terminal near the Texas Gulf Coast quickly filled up, creating a new bottleneck. This could be a periodic issue until the completion of a pipeline linking Jones Creek to the bigger ECHO terminal by year-end. In the meantime, ICE Brent was supported by production outages and open arbitrage to Asia. On average, the ICE Brent/Nymex WTI front-month differential was at $17.50/b, the lowest level since July, down $3.50 from December.

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