Dow Jones Institutional News; New York [New York]15 May 2019.
By Crystal Kim
Crude oil prices are forking.
U.S. crude oil is priced at a near $10 discount to Brent, the international benchmark, the widest gap between the two since October of last year. That spread will create short-term winners and losers across the energy complex.
West Texas Intermediate spot prices were hanging out at $62 a barrel following a U.S. Energy Information Administration data release showing a surprise buildup in crude stockpiles. The EIA on Wednesday said that U.S. crude inventories rose by 5.4 million barrels for the week ended May 10.
U.S. Gulf Coast crude inventories have been on the rise, climbing more than 30 million barrels over the last six weeks through early May, almost four times the seasonal average, said Michael Tran, a commodity strategist at RBC Capital Markets, in a report published last week.
"North American balances are sloppy...U.S. inventories are high and would be higher had the U.S. not put a moratorium on imports from Venezuela or had the Saudis not made it a strategic imperative to cut exports to the U.S. Gulf to record low levels," Tran said. He is bearish on U.S. crude inventories.
In addition, oil production in the Permian Basin of Texas and New Mexico has been rising even without the pipelines to move it out, said Brian Kessens, an energy portfolio manager at Tortoise Capital. "West Texas crude is trapped inland," he said.
Meanwhile Brent spot prices rose nearly 0.9% to above $72 a barrel Wednesday morning. Investors appear to be reacting to heightened tensions in the Middle East in the last few days. Houthi rebels in Yemen claimed responsibility for a drone attack on oil infrastructure in Saudi Arabia. Tensions in the Middle East have been on the rise following the Trump Administration's end to waivers for Iran's oil importers.
The International Energy Agency in its Wednesday report said that geopolitical tensions in Libya, Venezuela, and Iran muddied the supply outlook. That's good for Brent prices, for now.
To be sure, the cost of transporting U.S. crude means it will usually trade at a $3 to $4 discount to international crudes.
The current spread between U.S. and international crude is likely to remain wider than average until pipelines in the U.S. come online and relieve the buildup in supply, said Kessens. Until then, U.S. producers could feel the hurt as they will have to sell their wares at a significant discount to Brent. Meanwhile, refiners will benefit as they buy U.S. oil cheaper and sell their products -- gasoline and jet fuel -- at prices tied to Brent.
Kessens expects West Texas Intermediate to trade in the $55 to $65 range and Brent in the $65 to $75 range.
Write to Crystal Kim at firstname.lastname@example.org