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The Crude Oil Futures Market Structure

Source: OPEC 5/9/2013, Location: Europe

The Nymex WTI market structure narrowed over the month as new pipelines started to reduce the bottleneck in the Cushing area, the home of WTI. The Longhorn pipeline — which was reversed to run from Crane, Texas, to the US Gulf Coast (USGC) — began filling around 800,000 barrels of crude oil. The link will reach a total capacity of 225,000 b/d by 3Q13, but is expected to kick off flows at 75,000 b/d.

At the same time, the Permian Express pipeline, slated at some 90,000 b/d initially, is expected during 2Q13 and could further contribute to diverting the crude which historically flowed to Cushing directly to the US Gulf’s refining center. At the same time, the Seaway pipeline appears to be operating at a maximum capacity of around 335,000 b/d (not 400,000 b/d as originally forecast), taking crude directly from Cushing to the Texas Gulf Coast. Together, the new pipelines are narrowing the prolonged contango market structure.

In March, the 1st month vs. 2nd month time spread came down to an average of 40¢/b, compared to about 50¢/b in the previous month. The ICE Brent backwardation market structure narrowed by almost half due to lower prompt requirements amid substantial levels of seasonal maintenance in Europe. The Dated Brent vs. 3rd month spread even slipped into contango for the first time since July.

Additional supply of Russian crudes to Europe also pressured the Brent market. The spread between the 2nd and 1st month of the ICE Brent contract averaged around 55¢/b in March, the lowest since July, compared to 90¢/b in the previous month. The transatlantic arbitrage spread narrowed notably over the month, as incoming pipeline infrastructure in the US alleviated supply pressure on WTI’s pricing point.

The Brent-WTI spread was last seen hovering around the $13/b mark. The narrowing of the Brent-WTI spread was also due in part to a weaker Brent market amid considerable levels of maintenance in Europe. In addition to weakened crude buying, the North Sea crude market may have lost significant support over the last few weeks, as South Korea announced it will close tax loopholes from 1 July, which allowed for ample flows of Forties and other North Sea crudes to the Asian country last year. On average, the ICE Brent-Nymex WTI front month differential was at $16.60/b, the lowest level since July, down $4.17 from February.

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