Are Record Oil Stockpiles Still Hurting the Price of U.S. Crude?

Brent — the European benchmark for crude oil prices — fell from its nine-month high, lowering its premium to West Texas Intermediate crude for the first time in nine days. In comparison, the WTI fell below $95 per barrel for the first time since January 23.

Four straight weeks of gains gave the European benchmark its greatest increases since July, but it dropped 0.9 percent on Monday. For March settlement, Brent was down $1.33, at $117.57 per barrel, on the ICE Futures Europe exchange in London. The number of futures exchanged also dropped, falling 8 percent below the 100-day average.

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In the past several days, the European benchmark has changed course, backing down from its recent gains. Futures contracts increased $1.66 to $118.90 on February 8, their highest level since last May. Along with the increase in contract prices, the spread between Brent and the U.S. benchmark, WTI, was at its widest since November 26. The gap was widened by reports from China showing that net crude imports were 24.87 million metric tons, a figure equivalent to 5.88 million barrels per day, the most since May…
But now Brent is falling, and due to the recent drop, the gap has narrowed between the two benchmarks. The European benchmark grade was at a premium of $22.52 to WTI on Monday.

“The market in London is long due a correction,” VTB Capital analyst Andrey Kryuchenkov told Bloomberg. He added that some market participants “already eye resistance at $120.”

The gap between Brent and WTI increased after Enterprise Product Partners (NYSE:EPD) announced at the end of January that the capacity of its Seaway pipeline, which connects refineries at the Gulf Coast to the crude transit hub in Cushing, Oklahoma, would be limited until the end of 2013. However, the spread is expected to improve; analysts at Goldman Sachs predicted that the Brent-WTI gap will decrease to $7.50 a barrel in the second quarter once the pipeline reduces the record oil stockpiles in Cushing, which will raise the price of U.S. crude against its European equivalent.
Yet market speculation remains mixed for the world’s two main crude oil futures contracts.

“With GDP growth set to accelerate in the second half of 2013 and limited supplies, we see a growing risk of Brent prices spiking to $130 a barrel this year,” Francisco Blanch, Bank of America’s head of commodities research, wrote in a report on February 10.

Bets that crude prices will rise outnumbered short positions by 192,195 lots, the London-based futures exchange said on Monday. According to the publication, that is an increase of 6.9 percent from the previous week, which brings net-longs to their highest level since at least January 2011.

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