The WTI price is likely to undergo downside risks over the next 3 months, a report by Bank of America Merrill Lynch said.WTI crude oil prices fared significantly better than Brent in this oil price drop as Cushing stocks remain very low. Yet Cushing faces an imminent ramp-up in inflow capacity which may temporarily send WTI prices lower. Higher inflows and reduced outflows from Cushing may temporarily result in stock-builds by year-end. Moreover, LLS trading at a premium to Brent in the Gulf Coast has led to Nigeria just exporting its first cargoes to PADD3 since May.

“We calculate that a $1 increase in the LLS-Brent spread has on average been associated with a cumulative 120 thousand b/d increase in imports into PADD 3 two months later. With Gulf Coast inventories bloated, the additional supplies may back up into Cushing, dragging down WTI.”

Moving into 2015, the balance for WTI reverts back to undersupply as pipeline capacity leaving Cushing and pipeline capacity bypassing Cushing is expanding. Thus, stocks at the hub may again run at low levels in 2015. The imbalance between outflow and inflow capacity in the Cushing area will be even more pronounced in 2H15, the report said.

In fact, Cushing could become a transit point, not a storage hub anymore, at least until the Keystone XL pipeline turns operational around 2017/18. This should keep the forward curve in backwardation and contribute to push WTI prices back up to $90/bbl in 2015.

WTI may also find support in 2015 from shale oil output growth peaking this year. When looking at production per rig in new wells in the 4 major basins, the rate of growth has come down substantially in the past 6 months, a trend we expect to continue. Shale oil output in 2015 will average 5.25 million b/d, equivalent to growth of 744 thousand b/d, down from 980 thousand b/d this year.

Of course, the lower WTI goes near-term, the sharper the slowdown. Shale oil is highly price sensitive. "Our preliminary analysis indicates that, on average, a 20% drop in crude oil prices reduces shale production by 8% or 350 thousand b/d, all else equal," the report said.
Source: Bank of America Merrill Lynch