Even after a surprisingly vigorous surge in U.S. crude oil prices finally eliminated a three-year discount versus global benchmark Brent, some cash markets are sending a curious signal: refiners are ready to pay even more.
U.S. oil futures reached parity to European Brent on Friday for the first time in nearly three years, a sign new pipeline capacity is finally moving a glut of crude out of the U.S. Midwest. The gap, which before 2010 rarely widened to more than a few dollars, was $10 in early June and $23 in February.
It seemed clear what should happen next: Spot crude markets, where refiners and producers haggle over cents on the dollar for cargoes and pipeline batches, would fall. The same glut that had depressed prices at the delivery point of Cushing, Oklahoma, for years would shift south, pressuring prices in Houston and the trading hub of St. James, Louisiana.
For the moment, however, the reverse is occurring. Light Louisiana Sweet (LLS), a marker for light, sweet crude on the Gulf Coast, is getting stronger instead of weaker versus Brent, signaling that refiners are prepared to pay even higher prices for crude - domestic or foreign - despite seemingly abundant supplies from Texas's Eagle Ford and Permian Basin.
The reasons for the increase are both fundamental and structural. For one, Gulf Coast refiners are running at record rates, enjoying robust margins on exported fuel. In addition, light crude imports from Canada have been disrupted, spurring unexpected demand from Midwest refiners.
But it also reflects a disconnect along the Gulf Coast. While new pipeline capacity is sending more and more Texas shale oil and crude from the Cushing, Oklahoma, hub to refiners on the Texas coast, there are limited options to send crude 300 miles to the Louisiana coast as pipelines have not yet been completed....MORE
Monday, July 22, 2013
Oil: "As WTI and Brent reunite, Gulf of Mexico faces squeeze, not glut"