OIL FUTURES: Oil Benchmarks Move Closer Together, Even As They Fall
18 May 2012 - 6:54AM
Dow Jones News
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