Trading the Brent/WTI Spread

As the north-south pipelines open up the option of sending product from the Gulf of Mexico to Europe the spread should, theoretically, narrow.
From Hard Assets Investor:
Investors Can Profit From Decline In WTI-Brent Spread Fueled By Pipelines Changes

Futures and ETFs tied to oil benchmarks offer exposure to narrowing price spread.

After gradually widening through the end of 2012, the spread between the two pre-eminent crude oil benchmarks—Brent and West Texas Intermediate (WTI)—is starting to narrow. Can the gap close further and will WTI ever reestablish itself at parity with Brent? In this article, we take a look at the latest developments in this key oil spread.

Prices For Brent & WTI


Historically, Brent and WTI traded at similar levels. Indeed, the higher-quality WTI often traded at a slight premium to Brent crude. But starting in 2010, the situation changed and Brent began trading at enormous premiums to its U.S. counterpart.

WTI has now traded at a discount to Brent for 29 months and counting, the longest such stretch in history. More importantly, we also see a discount through the entire forward curve up to 2020.

Crude Oil Forward Curve


The culprit is the glut of oil at Cushing, Okla., the delivery point for Nymex light, sweet crude oil contracts. Surging production in Canada’s oil sands, and more recently, rapidly escalating output levels in the United States, have saturated the greater Midwest region with crude.

In fact, at 115 million barrels, crude oil inventories in the Midwest are at 78 percent of the net available shell storage capacity, according to Department of Energy data. Only 32 million barrels of capacity remain in the Midwest, most of it in Cushing. Therefore, the extremely wide discounts we see on WTI trapped in the Midwestern system is the market's way of allocating this increasingly scarce storage capacity....MORE

Recently:
Expanded Seaway pipeline start-up proceeds, crude flows--Next Steps: Double Capacity Again, Watch WTI-Brent Spread Shrink, Saudis Cry (ENB; EPD)
Brent-WTI Spread Narrows as Seaway Pipeline Readied to Move Oil From Cushing Bottleneck to Gulf Coast Refineries
Counting the Barrels of Oil Leaving Cushing (EPD; ENB)
Goldman, Oppenheimer Weigh In on the Brent-WTI Spread