US Oil Market Update – A World Apart

Record refining runs combined with record exports in late June have led to fears of chronic undersupply at the Cushing hub. Consequently WTI moved into steep backwardation in early July and the Brent-WTI spread has narrowed from highs of $11.4/ bbl in early June down to $3.9/ bbl July MTD, as the market signals to refill Cushing. The MEH-Cushing spread has moved from $8.6/ bbl in early June to just $0.5/ bbl on 24-July (since recovering to $1.75/ bbl ), effectively shutting the walk-up arb on the Marketlink and Seaway pipelines from Cushing to the Gulf Coast. This will encourage oil to stay at Cushing rather than flow to the Gulf Coast for export. Where do we go from here? The narrower Brent-WTI spread will discourage incremental crude exports beyond contractual firm commitments, with Sinopec stating they will not take any US crude for August delivery, according to a Bloomberg report. Moreover, refinery maintenance in September and October will reduce domestic consumption. With lower exports and runs , Cushing will start to refill from September. We therefore see Brent-WTI widening again in Q4 , due to the weakening demand for WTI-priced crudes and simultaneous strength in Brent, which will be supported by the loss of Iranian crude from November. Turning to the Permian, we expect Midland crude to trade at a premium to Cushing by end-2019 owing to various new pipeline projects due in 2H19 providing access to the higher priced Gulf Coast market.