As the discount of U.S. crude to global benchmark Brent nears three-year highs, an emerging bottleneck at the key storage hub in Cushing, Okla., is making U.S. futures vulnerable to a drop, traders and analysts said.
Infrastructure constraints in the shale-rich Permian Basin have already kept U.S. oil prices below international grades. Now, new constraints threaten to depress them even further and widen the gap between U.S. West Texas Intermediate crude (WTI) and global benchmark Brent.
Pipelines are overwhelmed as U.S. crude production continues to hit new highs. The bulk of the record 10.9 million barrels per day (bbl/d) produced last week came from the Permian Basin of West Texas and New Mexico.
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Permian barrels typically go to the Gulf Coast for refining or export, but those pipelines are full. More oil has thus started to flow to the storage hub of Cushing, where U.S. futures are priced.
As a result, northbound pipes, too, are nearing capacity. Cushing inventories may, therefore, start to rise, which, if it happens, could further widen the difference between WTI and Brent.
WTI is down 8% from its 2018 high while Brent slipped about 5% from its peak.
On June 14, WTI traded as much as $10.25 below Brent; earlier this month, the discount was as much as $11.57, its deepest since March 2015.
Raymond James said it expects a spread of $15 per barrel by the end of 2019 on North American output growth.
"The production growth in the U.S. is just going to continue to overwhelm the infrastructure buildout," said Vikas Dwivedi, global oil and gas strategist at investment bank Macquarie.
So far, the Cushing builds have not come as Midwest refiners process record amounts of crude to meet summer demand. Last week, inventories there fell 687,000 barrels to 33.9 million barrels, according to government data.
For the week ending June 1, pipeline utilization from Cushing to the Gulf Coast was about 92%, data from market intelligence firm Genscape showed, compared with about 89% and 88% in April and May, respectively.
Canada, which produces heavy crude, is also ramping up production. As refiners are in search for "a similar spec Venezuelan crude," RBC Capital Markets said in a note, these heavier Canadian barrels are being prioritized overabundant light shale on Cushing pipelines.
The bottlenecks will likely remain until the end of 2019 or early 2020, when about 2.4 million bbl/d of Permian-to-Gulf pipeline capacity is added, Tudor, Pickering, Holt & Co. said in a note.
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