x Abu Dhabi, UAEWednesday 17 January 2018

Gap between London and US crude narrows

Price gap between Brent and WTI likely to shrink due to Canadian wild fires.

A yawning gap between European and US benchmark crudes that has persisted for months is about to narrow, at least until Canadian wildfires are doused.

What links forest fires in northern Alberta to crude prices in London and New York?

The answer is the Cushing, Oklahoma, tank farm: the delivery point for crude traded in New York.

Yesterday both the US benchmark West Texas Intermediate (WTI) and North Sea Brent crudes rebounded from three-month lows after crude inventories at Cushing unexpectedly fell by 1.5 million barrels, the biggest weekly drop for nearly a year.

Crude for June delivery rose 2 per cent to US$98.80 a barrel in New York, while the comparable Brent contract climbed 1.5 per cent to $111.67 in London.

That pushed the Brent-WTI spread below $13, down from a record $19.54 in February, which occurred as political turmoil spread across the Middle East and North Africa (Mena) region and Cushing stockpiles swelled.

Last year Brent averaged just 76 cents a barrel more than WTI.

The European benchmark crude has historically traded at a discount of about $2 a barrel to its US counterpart.

WTI's relatively muted response to unrest in the Mena region was because of Cushing's land-locked location. These days, its tanks are mainly filled by crude extracted from Canada's oil sands.

Canadian oil ouput has been climbing steadily as US demand has stagnated, and the excess has piled up at Cushing. It has nowhere else to go: a proposed pipeline link to refineries on the US Gulf coast is on hold because of heightened local concerns about oil spills.

But now fires described as "viciously out of control" in Canada's main oil-producing region are forcing oil companies to halt production and evacuate staff. The affected area overlaps the oil-sands belt. Royal Dutch Shell yesterday shut down two oil-sands projects.

Several other big operators have also halted or slowed output, and at least one oil pipeline from the region has been closed.

That means less crude flowing into Cushing and less to stop WTI from matching Brent.