Tight Crude Spread Influences Rail Shipments

July 2, 2013 06:31 AM

pipelines l The Brent crude-WTI spread dropped to an 18-month low of just $5.94/bbl last week. Floods and a pipeline rupture in Alberta have slowed the flow of light sweet crude temporarily and the result has been a reduction in Midwest crude supplies. The Brent-WTI spread had reached as high as $23.00 in February of this year as WTI supplies ballooned.

But the declining spread has had its impact on rail transport of domestic crude. Light sweet crude -- the type pulled from shale reserves -- generally travels to Cushing, Oklahoma. But at times when the spread is wide, and Brent draws a premium to WTI, crude producers will ship the oil the extra miles to the Gulf where they can capture the higher benchmark Brent price at Henry Hub. But when the Brent-WTI margin thins, economics force producers to ship to Cushing, collecting the lower, WTI price.

The current narrow spread has taken its toll on crude shipments by rail and as trains make more trips over fewer miles, the expense of transport becomes a factor. The spread is expected to remain at or near current levels until Brent can regain some strength.

Weak projected demand in China is driving the price of Brent lower at present, but planned maintenance later this summer in the North Sea will reduce Brent production and lend some price strength to futures. Meanwhile, pipeline additions and the nimble transport of crude by rail should keep WTI below the Brent price. But a pipeline shutdown in Alberta remains an issue, and the ensuing curtailments have WTI on the rise. The pipeline in question transports nearly 1 million barrels per day and without that level of supply streaming in, U.S. inventories of crude in the Midwest have shrunk, spurring WTI higher.

Tensions in Egypt and Syria are bleeding into Brent pricing, however, and conflict there threatens to inject a fear premium into Brent futures. Expect Brent futures to inch upward as unrest and weak economic data from China makes headlines and later this summer, when maintenance at North Sea terminals reduce Brent production. Meanwhile, reports from Canada are that repairs are being made along the Athabaskan pipeline and restoration of the flow of light sweet crude from the tar sands will help rebuild U.S. crude supplies, pressuring WTI lower.

The current (11:30amCT) WTI-Brent crude spread lies at a long time low of $4.78 with Brent at $103.53 and WTI at $98.89 -- both moving sluggishly higher.

hoto credit: Nick-K (Nikos Koutoulas) / Foter.com / CC BY-NC

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