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Calgary Herald: Brent’s becoming the global crude

Friday 15 June 2007

West Texas price discount expected to grow

BLOOMBERG: West Texas Intermediate may maintain or widen its discount to Brent oil until 2009 because of pipeline bottlenecks in Cushing, Oklahoma, where the crude is delivered, Sanford C. Bernstein & Co. said.

WTI, the grade for futures trading in New York, has been at a discount to Brent since February and the spread reached a record $6.54 a barrel on May 24. WTI has lagged behind because U.S. refinery outages cut demand and there aren’t the pipeline links to export the crude to other regions, Bernstein said.

Brent, a North Sea oil that’s used to price crude sales in Europe and Africa, has risen because of production halts in Nigeria. The premium has increased hedging risks and may threaten WTI’s place among global benchmarks, the International Energy Agency said in March.

“We believe the bottleneck at Cushing is a key constraint, which is unlikely to reverse before 2009,” Neil McMahon, a London-based analyst at Sanford C. Bernstein, said in a report. “Brent could be seen as being a more ‘global’ crude, which should lead to a change in the way investors and analysts model oil prices.”

Inventory in Cushing fell 131,000 barrels to 26 million barrels in the week to June 8. Still, stockpiles remain about 15 percent higher than in the same week last year.

“The WTI-Brent spread will narrow over the next three months,” said Francisco Blanch, the head of global commodities research at Merrill Lynch & Co. That will happen because of decline in Canadian crude supplies following facilities maintenance, curbs in OPEC exports, and increase of refining utilization in the western part of the U.S, he said.

The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, last year pledged to cut supplies by 1.7 million barrels a day to keep prices near $60 a barrel.

Brent’s premium to WTI was $3.53 a barrel at 5:40 p.m. in London. Brent traded at an average of 99 cents more than WTI in the last 12 months.

Brent’s premium has been supported by supply disruptions in Nigeria, Africa’s largest oil producer, Bernstein said.

Nigeria’s oil production fell in May to its lowest since early 2003, with more than 800,000 barrels a day halted, the IEA said this week. Militant attacks, community disputes, pipeline leaks and other damage were responsible.

The Movement for the Emancipation of the Niger Delta has attacked oil installations in the Niger Delta for more than a year in a campaign to cripple Africa’s biggest oil industry. Its raids have forced Royal Dutch Shell Plc’s and Eni SpA’s units in Nigeria to halt output totaling more than 600,000 barrels a day, over a quarter of the country’s production.

Reduced supplies from Nigeria and higher demand for crude from Asian refineries have left less oil for Europe, boosting the Brent price. Declining production in the North Sea also provided support.

“The creation of a bottleneck at Cushing has been driven by increasing Canadian oil sands production,” McMahon and Bernstein analysts Ben Dell and Sebastian Williams-Key said.

“Northbound pipelines out of Cushing are slowly being reversed to let Canadian crude in.”

The shortage of capacity to transport WTI crude can be alleviated by the construction of a new pipeline or the reversal of the Seaway pipeline that today carries oil from the Texas coast to Cushing, Bernstein said.

“The bottleneck is unlikely to be eased until 2009 at the earliest and could become worse,” the report said. “A Seaway reversal is unlikely before 2009, if at all, because of regional demand for non-Canadian crude, while a new pipeline would take 3-5 years to build.”

Calgary-based TransCanada Corp., Canada’s biggest pipeline operator, in March said it may extend its proposed Keystone pipeline from Cushing to the Gulf of Mexico coast.

“As more storage capacity becomes available around Cushing, the spread should narrow,” Blanch of Merrill Lynch said.

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