US crude to regain brent premium, briefly, on storage bid

For only the third time since 2010, U.S. benchmark West Texas Intermediate crude traded at a premium to global marker Brent on Monday, restoring for a few brief moments what was once the normal hierarchy of the world oil market.

While the premium lasted less than five minutes before U.S. futures CLc1 closed at a 70-cent discount, a growing number of oil traders say WTI could ride high for days if not weeks in the near future, the latest surprising twist in a closely watched spread that has flummoxed the market for the past five years.

The reason they cite for the inversion in the so-called Brent/WTI spread CL-LCO1=R: the lucrative but temporary appeal of buying U.S. crude for storage in Oklahoma oil tanks.

As OPEC chooses to maintain output, an expanding surplus of crude has hammered global markets, driving both WTI and Brent down by some 60 percent since June and putting near-term oil prices at a $9-abarrel or more discount versus those in a year's time - a structure known as "contango" that makes it advantageous to buy crude now and store it for later sales.

But for traders in the main European markets, that means chartering supertankers to use as floating storage at a cost of $1 a barrel or more per month, traders say. A dozen or so have already been fixed, Reuters has reported.

By contrast, physical crude storage at Cushing, Oklahoma, the delivery point for U.S. futures, is far less expensive than offshore storage - as little as 40 to 60 cents a barrel per month. That demand for storage has lent a measure of support to the collapsing market, moreso than for North Sea Brent.

"The cost to store the next barrel at Cushing is small compared to the cost to store the next barrel of Brent," said Amrita Sen, chief oil analyst at Energy Aspects in London. "We thought that (the spread) was going to narrow, but it's happened earlier than we expected."

To be sure, several other important factors are also helping unwind a discount that has persisted since the onset of the shale oil revolution, when expanding output of domestic light, sweet crude became bottlenecked inside the United States, caused WTI to fall to a discount of more than $25 versus Brent.

For one, the risk of an everexpanding glut is subsiding as sub$50 a barrel crude prices begin to slow, if not stop, the ever-rising tide of shale production. Also, the United States has moved to allow more export of some domestic crude by approving some pending requests and considering a deal to ship some oil to Mexico, alleviating the bottleneck.

The inversion of the spread comes after a seven-month slump in the crude oil markets that has more than halved prices on the back of a supply glut coupled with lackluster demand. Both U.S. crude and Brent traded near six-year lows on Tuesday.

Just as few analysts anticipated the second-worst oil rout on record last year, so too have few expected Brent/WTI to flip again. As recently as December, analysts expected Brent to trade at a $4 premium to WTI in the first quarter, according to a Reuters poll. None were predicting parity. Since the start of the year, the spread narrowed 85 percent. On Monday, the spread settled at $1.36 a barrel, down from a $1.75 a settlement on Friday.

Oil traders and refiners are already moving to take advantage of the narrower spread, not only by storing crude but by exploiting what could be the first sustained reopening of the trans-Atlantic crude oil arbitrage window in years.