Price gap between WTI and Brent crude shrinks

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The discount on North American crude, which has cost Canadian oil producers billions in revenue in the past year, is shrinking rapidly as futures traders see new prospects for shipping oil to the Gulf Coast.

Enbridge Inc.'s announcement of a proposed new pipeline from Cushing, Okla., to Texas, is changing the dynamics of the oil market. Prices for West Texas intermediate (WTI), the benchmark price for North American oil, rallied sharply Wednesday on the news, before pulling back Thursday.

For the past 10 months, Canadian producers – whose prices are tied to WTI – have been taking steep discounts for their oil compared with international crude prices that are benchmarked against North Sea Brent, which can be shipped more readily. In the past, WTI tended to trade at a small premium to Brent, because it is easier to refine.

That spread hit a peak of $28.08 (U.S.) on Oct. 14, but has fallen dramatically since then. After Enbridge's announcement Wednesday, the differential narrowed by nearly $4; it widened slightly Thursday to $8.27 (U.S.), as both WTI and Brent lost ground.

For most of 2011, North American oil traders have focused on the glut of crude inventories at Cushing, a pipeline terminus and storage hub where future prices of West Texas intermediate crude is deemed to be settled.

Earlier this year, TransCanada Corp. began deliveries of Western Canadian crude through a new pipeline that ended at Cushing, while growing production of so-called tight oil in the U.S. added to the oversupply.

At the same time, production problems in the North Sea, the disruption of Libyan oil production and continued growth in Chinese consumption sent North Sea Brent and other international crude prices sharply higher. WTI prices also climbed after the Libyan civil war erupted, but not as quickly as those for Brent.

Now, traders are focusing on plans by Enbridge and other companies either to move crude out of Cushing to the massive refining hub on the Texas and Louisiana coast, or bypass Cushing altogether through the use of rail cars and barges.

On Wednesday, Enbridge announced it would spend $1.5-billion to purchase ConocoPhillips Co.'s half interest in the Seaway pipeline. The line was originally designed to bring oil from Texas to Cushing, but Enbridge and its partner, Enterprise Products Partners LP, plan to reverse the flow to take crude to the Gulf of Mexico.

Stephen Schork, a futures market analyst, said the spread between WTI and Brent began to collapse last month when the European crisis deepened over Greece and Italian debt problems, and traders began to shift positions from Brent – which is consumed in Europe – to WTI.

"I think the market really began to turn on the prospects of Europe going into recession," Mr. Schork said.

But he said there is a tremendous amount of speculation in commodity markets, and exaggerated shifts in sentiment happen rapidly. "The psyche of the market turns on a dime," he said. "The market just moves in lightning and breathtaking fashion."

Goldman Sachs analysts said they expect the WTI-Brent spread to narrow more quickly than they had previously forecast as a result of the Seaway pipeline reversal. They said it should fall to $6.50 within six months, but that the WTI discount would persist until more capacity was added to move crude out of the glutted mid-continent market.

In a report Thursday, David Greely, head of energy research at Goldman, said the WTI-Brent spread would persist at that level to reflect the fact the producers have resorted to using more costly rail routes to move their oil to Gulf Coast markets.

This week, the U.S. Energy Information Administration noted that producers in North Dakota's growing Bakken field began this month to ship crude by rail on the "Bakken Express," which can deliver 100,000 barrels a day to Louisiana's Gulf Coast with plans to expand that capacity to 250,000 barrels a day.