U.S. oil price gap vanishing for first time in shale era
HOUSTON (Reuters) - The once-deep discount for benchmark U.S. crude oil prices versus global rates is about to disappear for the first time since the rise of the shale oil boom, a sudden reversal that highlights the market's ongoing flux.
On Monday, U.S. West Texas Intermediate for delivery in March settled just 6 cents below global Brent crude for the same month (CL-LCO3=R), the narrowest gap since 2010. It was trading at more than $1 a barrel two days ago.
While U.S. crude has occasionally and briefly traded at a premium to Brent over the past five years, current spreads suggest it could be a longer-lived phenomenon this time. The April spread (CL-LCO4=R) contracted to 5 cents by the close of trade, while May Brent settled at a 22 cents a barrel premium to WTI, after trading at a low of 5 cents earlier.
Unusually, the prompt spread for January was wider than the later months at $1.44 a barrel premium to prompt WTI futures, down from a high of a $2.58 earlier in the day (CL-LCO1=R), although this appeared more likely tied to an unusually strong Brent market just two days before the contract expires.
Oil traders had mixed views on what was driving the sudden shift in the closely-watched and heavily traded spread, but it seemed to be sending a clear signal: heading into next year, the domestic oil market is likely to grow tighter while a global glut gets worse. That is likely to spur a renewed rise in U.S. imports and erase the cost advantage of U.S. refiners who have made billions of dollars gorging on cut-price domestic crude.
Some dealers suggested the spread was responding to signs from Washington that legislators may finally throw out a 40-year old ban on exporting U.S. crude as part of broader tax and spending legislation. While exports of refined products are permitted, exports of domestically produced crude are banned.
Abolishing the ban would provide a new outlet for domestic supplies that had unexpectedly doubled to nearly 10 million barrels per day (bpd) thanks to shale drilling, so much crude that it threatened to exceed domestic refiners' ability to consume it all. At times, due more to logistical bottlenecks than refinery demand, U.S. fell as far as $25 a barrel below Brent, although this year the gap has averaged just $5 a barrel.
Others, however, said the switch appeared more likely to be a response to increasingly divergent trends in oil supply
"In short, I think its the expectation of OPEC production weighing on Brent and the prospect of falling U.S. production supporting WTI further down the curve," Dominic Haywood, an analyst with Energy Aspects, said.
U.S. oil output has begun falling since it hit a 43-year peak in April 2015 of 9.6 million barrels per day, although the decline has been slower and shallower than many analysts expected, weighing on prices. Last week, the Energy Information Administration said it expected U.S. supply to fall 570,000 bpd in 2016, more than forecast a month earlier.
At the same time, global markets are bracing for increased global supplies following the easing of sanctions against Iran. Once those barrels hit the market, global inventories are expected to grow by 300 million barrels, according to a recent report from the International Energy Agency.
"We're finding the 'oil glut' is more a foreign crude problem, not so much in the U.S., where we're [refineries] are still running 16.5 million barrels per day," according to Carl Larry, an analyst with Frost & Sullivan.
The four-week moving average for refiner crude inputs has averaged 16.5 million barrels a day, up from 16.2 a year ago, as refiners have sought to take advantage of high margins for gasoline.
(Reporting by Liz Hampton; Editing by Andrew Hay and Alan Crosby)
