BLBG: Oil's Record U.S. Discount Lets Investors Quadruple Money: Energy Markets
U.S. oil, the cheapest in almost two years relative to other grades of crude, is poised to extend its discount, giving investors who trade price differences a chance to more than quadruple their money.
West Texas Intermediate crude, or WTI, futures on the New York Mercantile Exchange may drop to $8.50 less than North Sea Brent before it rises again, based on the median forecast of 10 traders surveyed by Bloomberg. It has averaged $1 a barrel more than Brent in the past 10 years, data compiled by Bloomberg show. WTI was $7.21 a barrel cheaper than the European benchmark blend at 8:26 a.m. London time today, the biggest discount since February 2009.
The difference between the two crudes has more than doubled this month amid swollen stockpiles at Cushing, Oklahoma, the main delivery point for Nymex futures. Inventories have jumped 18 percent since November as TransCanada Corp. started a pipeline bringing Canadian supplies to the region, according to the Energy Department in Washington. At the same time, outages in the Norwegian section of the North Sea have placed a premium on the earliest deliveries of Brent, the benchmark grade for two-thirds of the world’s oil market.
“A Brent premium over WTI will become this year’s norm,” said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London. “If we keep building inventories at Cushing, there’s obviously more room for the spread to widen.”
Turn Into Profit
While the spread, or price difference, between next-month WTI and Brent futures has jumped almost $5 since Dec. 1, the gap between longer-dated contracts has increased less, offering investors an opportunity to profit, according to Petromatrix GmbH, a Zug, Switzerland-based industry researcher.
With the spread on contracts for delivery a year from now at $1.47 yesterday, it would cost a trader $1.47 million to buy 1,000 lots of January 2012 Brent and sell the same amount of WTI. That would turn into a $5.2 million profit in a year’s time, should the spread widen to the current level of the front- month contracts, Bloomberg data show.
“It’s a pretty good risk-reward trade,” said Olivier Jakob, managing director of Petromatrix. “It’s at a narrow discount and there’s very little chance it’ll go back to a premium.”
Eight of the 10 traders questioned in the survey said Brent’s premium will remain in place for the rest of 2011. The highest forecast was $10 and the lowest $7. The survey was conducted Jan. 12-13.
‘Relieve Pressure’
For Deutsche Bank AG, Brent’s premium is “an anomaly” that will subside as supplies at Cushing diminish. The extension of TransCanada’s Keystone pipeline as far as the Gulf Coast “could relieve some of the pressure” on tanks in Oklahoma, Adam Sieminski, the bank’s Washington-based chief energy economist, said in a Jan. 11 report.
Brent’s growing premium to WTI coincides with a shift in trading away from Nymex oil as China and other emerging markets lead global energy demand. The volume of all Brent contracts bought and sold on the ICE Futures Europe exchange rose 57 percent in the past year, compared with a 26 percent increase for WTI, according to data from the exchanges. WTI volumes are still 80 percent higher than those for Brent.
“There are indications that volumes to some extent are moving over to ICE Brent,” said David Wech, head of energy research at JBC Energy in Vienna.
Canadian Crude
As much as 156,000 barrels of additional crude a day will arrive in Cushing from next month once the Keystone pipeline starts, according to JBC. More may come in during February and March as Enbridge Inc. carries out maintenance on the 290,000 barrel-a-day line between Indiana and Ontario, said Lawrence Eagles, head of commodities research at JPMorgan Chase & Co.
“There’s a lot of Canadian crude looking for an outlet and you could see a shift of that bottleneck into the mid-West,” said New York-based Eagles.
WTI has historically traded above Brent because of its lower-sulfur composition and the added cost of shipping Brent- priced crudes to U.S. refiners. Brent rose above WTI on Aug. 17 last year and has averaged $2.49 more since then, its longest- running premium since at least 1991.
“We do not expect WTI’s discount to disappear quickly,” Sieminski said. The completion of the TransCanada link, scheduled for 2013, remains “a long way off,” he said.
