Commodity: WTI-Brent likely to remain elevated

9 years ago - Published in Finance, Fundamental Analysis

Morgan Stanley analysts said several factors should support relative WTI strength in 2Q16. Spot WTI-Brent increased from more than -$3.50/bbl to near parity in recent days. “Heading into 2Q, we see a growing risk that the USGC will need to price at a premium and call on light crude imports again, limiting forecasted stock draws”, said analysts in “The commodity manual, weekly highlights: Energy".

1) Upgrader maintenance tends to be heavy in 2Q. We estimate at least 200 kb/d of maintenance in 2Q16 on average, which serves to firm US crude balances.

2) Canada could pull more light crude oil. With heavy crude production growing, there may be more demand for diluent among the oil sands producers. Increased pipeline flows from PADD II to eastern Canada and falling conventional/shale production may also firm the Canadian light crude balance, and hence US.

3) US turnarounds, particularly in PADD II are scheduled to decline in April. Calling on more crude as less Canadian crude (esp light) is available.

4) Falling US light crude production. We also expect US production to continue to decline; production in 2Q16 could be down ~400 mmb/d YoY.

5) For Brent, EU and Asia turnarounds will be growing as US maintenance is fading. On a monthly avg basis, North American maintenance peaked in Feb and is moderately declining while non-NAM maintenance should rise into April.
Inland pipeline diffs can add to volatility. Some production is returning from winter shut ins, but increasingly pipelines may not have enough crude to even meet commitments. Thus, pipeline diffs can narrow on avg. The caveat is WTI may need to discount vs. the USGC to encourage greater outflows, which may offset some USGC premium.

Beware of contract pricing inconsistencies. Analysts should look at the swap contract or the difference in the physical spot crude prices. The prompt Brent and WTI contracts only trade the same delivery month for the last ~10 days of the month, which can make comparisons deceiving. CLCO1 tries to adjust for this by using the Brent contract timeline.

Source: Morgan Stanley Research