WTI and Brent spread to narrow!

A recent decision by Enbridge, pipeline’s new owner, to reverse the Seaway pipeline between U.S Midwest and the Gulf Coast, will enable to reduce the spread between the worlds 2 important oil contracts- WTI and the Brent Crude. The pipeline switch will help drain excess of crude oil inventories in and around Cushing, the delivery point of WTI contract. The surplus stock was the root cause of divergence. The Seaway pipeline could start moving 150,000 b/d to the coast by Q2 and increasing by 400,000b/d by 2013.

Along with the news on the pipeline, shipments of oil out of US Midwest has been rising rapidly(number of railcars transporting oil rose 19% from last year) with the Bakkan Oil Express moving its first crude last week. This could be crucial to maintain a hefty differential between WTI and Brent as cost of moving oil by rail, estimated at $5 to $10 a barrel, is significantly higher than by pipeline. Since the Seaway will not able to absorb all the volumes, rail capacity would still need to be considered to move the oil.

 
Analyst don’t expect WTI to trade at parity with the Brent, as tar sands production in Canada and surge in production of shale oil in Dakota would mean that there will still be a surplus of oil in Midwest. Beyond this, there has also been news about cancellation of key pipeline projects that can drown the “Cushing” syndrome. In addition, since the WTI/Brent spread has narrowed, producers and traders, who avoided delivery of oil in Cushing because of WTI trading at discount(low price of oil), will increase deliveries, causing a sharp rise in the inventories at Cushing.