Citi Sees Looming Glut Taking U.S. Oil Discount to 2013 Lows

(Bloomberg) -- Citigroup Inc. has a warning for U.S. oil investors: American crude prices may tumble to the steepest discount against global benchmark Brent since 2013.

West Texas Intermediate futures in New York will fall further to become as much as $15 a barrel cheaper than London’s Brent, said Ed Morse, the bank’s global head of commodities research. That’s because inventories in Cushing, Oklahoma -- the largest U.S. storage hub -- are set to grow as a pipeline bottleneck stops booming output in the Permian Basin from reaching the American Gulf Coast.

Citi Sees Looming Glut Taking U.S. Oil Discount to 2013 Lows

WTI’s discount to Brent has more than doubled since mid-July as crude produced in America’s hottest shale play finds it increasingly hard to reach export terminals and refineries on the coast. That’s pushed Cushing stockpiles higher in five of the last seven weeks. Meanwhile, fears that the Organization of Petroleum Exporting Countries may struggle to fill the void left by U.S. sanctions on Iran’s oil exports have helped buoy Brent prices.

“As U.S. production grows, the likelihood is overwhelming that a lot of the valves to get into the Gulf Coast are going to close,” Morse said in an interview during the Asia Pacific Petroleum Conference (APPEC) in Singapore last week. “It’s bottlenecked getting to the Gulf Coast but it’s not as bottlenecked getting into Cushing.”

Crude futures in New York rose 0.4 percent to $75.60 a barrel at 2:10 p.m. in Singapore, while Brent, the benchmark for more than half the world’s oil, was little changed at $85.06 in London. WTI for December delivery traded at a $9.65 discount to Brent for the same month.

The Forecast

A $15 gap in prices, as forecast by Morse, would be the widest spread since December 2013. Stockpiles at Cushing may grow from the current 20-million-barrel level to 70 million barrels by April, before new pipelines are added in the fourth quarter of next year, Morse said.

U.S. production has been hitting new records this year while rigs drilling for crude have also expanded. Soaring output, dwindling pipeline space and a rail and trucking shortage have raised shipping costs, increasing the discount producers in the region give to offload their oil.

“We expect that Permian production is going to continue to grow,” Morse said.
“We have production from Colorado to Oklahoma, even from North Dakota and Canada, that has to go to Cushing before getting to the Gulf Coast.”

Janet Kong, who heads BP Plc’s trading business in Asia, agrees that U.S. oil will stay pressured. On top of the pipeline squeeze in America, the ongoing trade quarrel between the world’s two largest economies as well as supply shocks outside the U.S. may lead to Brent’s gain over WTI, she said.

China would need to find supplies from elsewhere if it boycotts U.S. barrels, lifting the price of crude outside of America, Kong said. Meanwhile, shale production is likely to keep growing, she said. “It’s possible that WTI-Brent trading will be very volatile.”

©2018 Bloomberg L.P.