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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