Oil Prices

[dan_s]

Seasonal demand and Geopolitical Risk should support oil prices through year-end. Difference between WTI and Brent will eventually narrow but not in the near-term. Eagle Ford and Gulf Coast oil is selling close to Brent ($115/bbl). - Dan

Notes from Morgan Stanley Energy Team below.

Wider 4Q12 appears less likely: While we aren’t
outright bullish WTI-Brent, market expectations for a
materially wider differential this fall may be overstated, in
our view. The wider differentials seen recently are
primarily a function of a tighter Brent market, not
Cushing fundamentals, and may not carry into year-end.
Elevated refinery maintenance will challenge balances
this fall, but a number of mitigating factors should help
WTI-Brent remain near today’s levels of $17-18/bbl. In
fact, we see a real risk that WTI-Brent could narrow later
this year.
1. Weaker Brent structure into 4Q? As recent price
action has shown, Brent structure is a material driver of
WTI-Brent. Low product balances and seasonal demand
could keep a bid under Brent near term. However,
seasonally weaker crude demand (after mid-Oct),
returning supply, and the risk of an SPR release should
all help alleviate tight global markets this fall.
2. New alternatives suggest Cushing is unlikely to
face storage issues. New pipeline capacity out of
Cushing and West Texas and greater rail capacity
across the US offer new alternatives to Cushing. With
prices supporting rail to both the East and West Coasts,
a repeat of fall 2011 appears unlikely. Cushing stocks
should build, but new storage throughout the Midwest
should keep inventory manageable.
Headline risks exist on both sides of the trade. The
potential for an update on Seaway before year-end
could create excitement about WTI while Nov elections
and any escalation in the Mideast could bid up Brent.
WTI structure already discounting a fair amount of
bad news: Dec-Jan ‘12 time spreads recently traded
close to -$0.50/bbl, not far from the lows reported in
Mar/Apr when Cushing fundamentals were weaker. With
storage capacity continuing to grow, utilization is unlikely
to exceed the levels reported this spring, leaving the
risk-reward for WTI spreads interesting, but not
compelling. Perhaps more interesting is that a longer
turnaround schedule may help keep WTI-Brent wider
into the spring, despite Seaway’s expansion.