WTI Sheds Busted Benchmark Status as Glut Ebbs: Energy Markets
Comment of the Day

July 19 2013

Commentary by Eoin Treacy

WTI Sheds Busted Benchmark Status as Glut Ebbs: Energy Markets

This article by Moming Zhou for Bloomberg may be of interest to subscribers. Here is a section
“The speed that it happened was eye-opening,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by phone. “A lot of people made money from it but it also caught a lot of people off guard. We also saw severe contraction in the Brent versus WTI spread.”

Since the start of 2012, new and reversed pipelines have boosted capacity to Houston from the central U.S. by almost 1.2 million barrels a day, with 850,000 more coming online by the end of the year, according to data compiled by Bloomberg. Inventories at Cushing, Oklahoma, the delivery point for WTI futures, have dropped 11 percent from a record 51.9 million barrels in January, according to EIA data.

Enterprise Products Partners LP and Enbridge Inc. switched the direction of the Seaway pipeline last year to move barrels to the Houston area from Cushing. Planned expansions by Magellan Midstream Partners LP's Longhorn pipeline, TransCanada Corp.'s southern leg of Keystone XL and Sunoco Logistics Partners LP's Permian Express line will also divert supplies from Cushing.

Eoin Treacy's view The flood of oil moving towards Houston which has been diverted from the Cushing facility has contributed to a backwardation right across the oil futures curve highlighting the short-term supply deficit at the main storage terminal. This migration has also led to the spread between Brent crude and WTI contracting from record highs above $25 to negative territory today. This reasserts the historical premium WTI has enjoyed over Brent but the question now is how sustainable the situation is?

US oil production continues to surge so that the country is now not only the largest consumer but one of the largest producers. As the above article mentions, the USA is importing the least oil since 1986 with an overall deficit of just 12%. The supply glut at Cushing created an anomaly which has now been corrected by the market and as with such events, an over correction is possible. Following such an accelerated decline in the Brent – WTI spread the potential for a rebound has increased as it approaches an historical area of support.

In absolute terms, WTI continues to extend its rally but is approaching a potential area of resistance near the 2012 and 2011 peaks. A clear downward dynamic would confirm at least temporary supply dominance in this region.

Among the companies mentioned in the above article, Enterprise Product Partners (EPD) surged from the region of the 200-day MA in late June and has developed a short-term overbought condition. It has at least paused this week but a sustained move below the 200-day MA would be required to question medium-term scope for additional upside. Magellan Midstream Partners LP has a similar pattern. Sunoco Logistics Partners has been ranging in a relatively gradual reversion towards the mean since March. It will need to continue to hold above the 200-day MA if the benefit of the doubt is to continue to be given to medium-term upside potential. Canadian listed Enbridge Inc. also bounced from the region of the 200-day MA but not to the same extent as EPD. TransCanada has lagged the above pipeline companies, dropping below its MA and encountering resistance at the trend mean this week. It will need to sustain a move above this week's highs to reaffirm demand dominance.

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