OIL FUTURES: Oil Benchmarks Move Closer Together, Even As They Fall

Date : 05/17/2012 @ 4:54PM
Source : Dow Jones News

OIL FUTURES: Oil Benchmarks Move Closer Together, Even As They Fall

Operators of a pipeline that will transport crude from its U.S. Midwest storage hub to the Gulf Coast's refinery complex announced it will open the spigots this weekend. The move will reduce a vast glut of oil that has pooled in the middle of the country and narrowed the difference between the oil market's two benchmark contracts.

The spread between the contracts for West Texas Intermediate, the U.S. benchmark, and Brent, the European standard, contracted nearly $2 Thursday, to $14.93.

The flow of crude through the reversed Seaway pipeline, running from Cushing, Okla., to the Gulf, is expected to bring the two benchmarks closer to parity. The difference between the two contracts was more than $19 early last month.

Historically, the contracts usually traded within pennies of each other, but a large gap opened up in the last two years. WTI was weighed down by the excess supply bottled up in the Midwest; Brent was pushed up as Middle East tensions raised supply concerns.

Though the news was generally bullish for U.S. crude prices, the West Texas contract still fell on Thursday, settling down 25 cents, or 0.3%, to $92.56 a barrel on the New York Mercantile Exchange. The Brent contract fell by an even larger $2.26, or 2.1%, to $107.49.

Both contracts were beset by the continued move against risk assets in the markets and a sour economic outlook, weighed down by European financial woes and weak U.S. readings on employment and regional business activity.

Still, supply-demand fundamentals have been deteriorating in the oil markets, with U.S. government data showing inventories at a 22-year high, rising more than 10% in the last eight weeks on a combination of weakening demand and growing supply.

Though the Seaway pipeline is expected to carry 150,000 barrels a day to the Gulf, some analysts and traders say it won't be enough to reduce the growing U.S. supply glut at Cushing anytime soon--and maybe not even after its capacity is expanded to 400,000 barrels per day early next year.

"There are certainly those that believe even if you get to 350,000 or 400,000, it still won't alleviate oversupply," said Tom Bentz, director of BNP Paribas Prime Brokerage. "Right now, 150,0000 is not going to do it."

Nymex oil futures have fallen 16.3% from their highs earlier this year amid geopolitical tensions between Iran and the West, and 12.8% since the start of the month as financial conditions in Europe have turned south once again. Thursday's loss marked the fifth consecutive new low settlement for 2012, and analysts and traders say they see little upside to the market anytime soon.

"This is a steep and damaging drop in oil prices that will have implications for the foreseeable future," Dominick Chirichella of the Energy Management Institute said in a note. "The uptrend that was in place since late last year (mostly geopolitically driven) has been broken and all technical signs point to a sustained downward trend going forward."

Front-month June reformulated gasoline blendstock, or RBOB, settled down 4.27 cents, at $2.8782 a gallon, its lowest level since Feb. 2. June heating oil finished down 4.86 cents, at $2.8490 a gallon.

-By Christian Berthelsen, Dow Jones Newswires; 212-416-2381; christian.berthelsen@dowjones.com

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