The Crude Oil Futures Market Structure

Source: OPEC 6/4/2013, Location: Europe

The ICE Brent inter-month spread continued to weaken over April, flipping into contango for most of the month. Ample North Sea crude availability and high levels of regional maintenance have put the prompt Brent market under significant pressure in recent weeks. Volumes were partly lifted by prompt Forties availability on the back of strong production from the Buzzard field, which led to additional volumes being added to the April Forties loading schedule.

In addition, the increased availability of Oseberg up 29% m-o-m at 155,000 b/d also helped offset a sharp drop of around 66,000 b/d in Ekofisk exports. The front-end contango in the ICE Brent curve was short lived, as the 1st and 2nd month spread returned to a very soft backwardation, aided by a flurry of arbitrage cargoes of North Sea crude to the USGC and South Korea. In April, the 1st and 2nd month ICE Brent contract spread averaged a multi-month low of around 9/b compared to 55/b the previous month.

On the other hand, the Nymex WTI market structure narrowed further over the month as incoming pipeline projects in the US as well as a massive increase in rail takeaway capacity further north alleviated supply pressure on the Cushing storage hub. The reversed Longhorn pipeline in West Texas seems to have helped in this regard, which is also evident from rising prices for West Texas Sour (WTS). The crude, produced in the Permian Basin, has seen its price climb from a differential of close to $19/b below WTI to a recent record of a 15 premium, as the crude can now directly reach end consumers in the US Gulf. In April, the 1st month versus 2nd month time spread came down to average around 30/b, compared to about 40/b in the previous month.

The Brent/WTI spread temporarily narrowed to below $10/b for the first time since January 2012, settling at $8.90/b on the last trading day of the month. The spread averaged $11.35/b in April, a hefty $5.25 less than the previous month. In relative terms, WTI strengthened, while Brent weakened on the factors mentioned above. The narrowing spread is weighing on US refining margins in the midcontinent and could potentially inflict pain on coastal refineries that had banked on railroad inflows of distressed midcontinent crude. The appreciation of WTI, following the pipeline-related easing of the bottleneck around the Cushing storage hub, has also boosted outright prices for other grades in the region, such as Bakken, WTS and Western Canadian Select (WCS).

Refiners in the midcontinent appear to be seeking refuge from increasing prices by undertaking maintenance. As of the week to 19 April, run rates in PADD II slumped to 83.4%, the lowest level since April 2010, and a clear indication that current margins are becoming less profitable. In the past, heavy maintenance at PADD II tended to widen the Brent/WTI spread, as stocks around the Cushing area built up. The latest round of maintenance has also resulted in stock builds at the Cushing hub, but the link is no longer as direct due to increases in outbound pipeline capacity in the Midland and Cushing regions (Longhorn, Permian Express and Seaway pipelines), as well as a massive increase in rail takeaway capacity further north. The key question will be at what point the narrower Brent/WTI spread closes off rail economics, thereby freezing outflows of Bakken crude and causing a renewed regional crude overflow.

Meanwhile, two other key factors supported US crudes, causing transatlantic arbitrage to temporarily open. Most importantly, Mexican and Venezuelan grades, which make up base load crude for a large portion of the USGCs refiners, were comparatively more expensive than competing US crudes. Counter to historical trends, Latin American term volumes have been more expensive than US crudes. The high prices result from the formulas utilised (which incorporate WTI and WTS) to price Latin American term volumes. Accordingly, this strength has rubbed off on the domestic crude complex.


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