Brent preimium to WTI may be gone by mid-2014

[dan_s]

Crude oil stockpiles at Cushing, Oklahoma, are supposed to be rising right now, according to the models of pipeline flows constructed by many hedge funds. But that's not happening.

Instead, stocks have edged lower, even as heavy refinery maintenance was expected to lead to unwanted oil being dumped into the tank farms at Cushing, the delivery point for West Texas Intermediate crude oil futures, according to Robert Campbell, a market analyst at Thomson Reuters.

The cause of this disconnect seems to be untracked movements of crude out of the vicinity of Cushing on trains. Since these rail movements became known to the broader market, WTI has rallied against Brent crude futures, narrowing the gap between the two contracts by as much as $5 a barrel from early-March levels.

Furthermore, much of the softening in Brent has occurred in the forward curve rather than the flat price, which is only down slightly from late-February levels. As such, the narrowing of the Brent-WTI spread seems guided by U.S. market fundamentals. Buying has come into WTI, not just on the flat price but also on time spreads as traders bet the Cushing supply overhang that has weighed on WTI for years may soon unwind.