Barron\'s - 09.09.2019

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September 9, 2019 BARRON’S M11


CommoditiesCorner


Oil Benchmark Prices Narrow


ByMyraP.Saefong


U.S. BENCHMARK OIL HAS OUTPERFORMED THE GLOBAL BENCHMARK THIS YEAR,


leading prices in recent weeks to the narrowest spread in more than a year.


Analysts say the move isn’t about the trade war.


Thespreadbetweenfront-monthWestTexasIntermediatecrudeandBrent


crudenarrowedtoaslittleas$3.53abarrelonAug.19—thenarrowestsince


July20,2018,accordingtoDowJonesMarketData.OnSept.6,WTIfutures


settledat$56.52abarrelwhileBrentfuturesfinishedat$61.54,adifference


of $5.02. On the first trading day of this year, that spread was closer to $7.


“Historically,wehaveseenthatspreadgotheotherway,withWTItrading


atapremiumtoBrent,”saysRyanDusek,adirectorinOpportune’sCommod-


ity Risk Advisory group.


Thepricedifferenceisimportanttoproducersandrefinersbecauseitaf-


fectsrevenue.Thespreadalsohelpsthemarketmonitorsupplyanddemand.


A narrow spread indicates a tighter balance of supply and demand.


Growth in pipeline capacity contributed to the narrower spread, allowing


moreoiltoflowfromthePermianBasinintotradinghubsinHoustonandCor-


pus Christi, Texas, where it gets a better price and makes its way to export


markets,saysNoahBarrett,researchanalystatJanusHendersonInvestors.


ProductionfromthePermianBasin,thelargestcrude-producingregionin


theU.S.,hasoutpacedthepipelinecapacitytobringthatoiltomarket,prompt-


inganexpansionofpipelineinfrastructure,accordingtotheU.S.EnergyInfor-


mation Administration. That included a conversion of the Seminole-Red this


year into a 200,000-barrel-per-day crude pipeline.


Whenpipelinespaceisconstrained,explorationandproductioncompanies


competeforscarcepipecapacitybycuttingpricestoobtainaccess,saysStew-


artGlickman,energyequityanalystatCFRAResearch.ThatweighedonWTI


but not Brent, and helped contribute to a wider


spread.ButwithnewU.S.pipecapacityoperational,


WTI got a lift, leading to a narrower spread.


The U.S.-China trade war is not a factor in the


spread’s compression. It actually contributes to a wider WTI-Brent spread,


saysRebeccaBabin,aseniorenergytraderatCIBCPrivateWealthManage-


ment.“Themuchlargerissueiswhatthetradewarimpliesforglobaldemand


growth,”shesays.ChinesetariffsonU.S.crudemakeitlessattractiveforim-


ports by China, which would lead to a wider spread.


Producers have reduced output since the start of the year in an effort to


balance supply and demand. The Joint Ministerial Monitoring Committee,


whichincludesmembersandsomenon-membersoftheOrganizationofthePe-


troleumExportingCountries(OPEC+)whooverseecompliancewiththeout-


put-cut deal, plans to meet on Sept. 12.


Basedonsupplyanddemandestimates,OPEC+mayneedtocutonemil-


lion barrels per day in 2020 to eliminate the supply overhang, Babin says.


“MessagingfromOPEC+isexpectedtobeverysupportiveofthecommodity,


and anything less will be bearish” for prices, she says.


Opportune’s Dusek says that he doesn’t expect major news out of OPEC.


Still,“theyareinatoughspotrightnow.Withslowerdemandandcutsforthe


foreseeable future, they are running out of options,” he says. Dusek expects


pricestoclimbbeforeasignificantdeclineinthelongterm.HesaysWTIcould


rise to a range of $65 to $70 in the short-term, but prices are then likely to


“grinddownforthenextthreetofouryears,”withWTIeventuallybottoming


out at about $20.


CommodityIndexes,


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