Front-end NYMEX WTI time spreads remain in contango but have firmed up in recent months and Bank of America Merrill Lynch said they believe WTI could flip into temporary backwardation later this year even as their “fair value model suggests the move may be overdone.”With Seaway helping clear infrastructure bottlenecks, plus upcoming starts of Longhorn, Permian Express and Keystone Gulf Coast pipelines, potential crude take away capacity at Cushing may move well above supply in 2014, a report from BofAML said.
Still, high refinery utilisation rates in the US may constrain the ability to process surging supplies. After a 1.2 million b/d expansion in 2012, we see North American oil output growth rates nearing 800 thousand b/d annually on a forward basis to 2017.
Thus, with total US crude oil stocks at 382.7 million bbls, backwardation in WTI may just be temporary.
Meanwhile, there are many reasons to believe that the Brent market is likely to stay in backwardation for a long time going forward. Having spent 14 out of 16 years in backwardation in the 1989-2004 period, Brent went into contango from 2005 to 2010. Since 2011, Brent has once again moved into firm backwardation, with front-to-third month time spreads averaging $0.66/bbl in the past 12 months, compared to an average of $0.04/bbl in the previous 24 years.
The fact that Brent has stayed in backwardation is surprising given the double-dip recession that Europe has suffered in recent quarters. European oil demand fell off a cliff in 2012, with consumption dropping from 14.4 to 13.7 million b/d, almost matching the contraction experienced in 2009.
However, stocks have failed to build due to supply scarcity and limited credit availability at refiners. Looking out, we still expect backwardation in Brent to continue, although a potential cut to rebates in South Korea and a return of South Sudanese oil could briefly temper near-term Brent spreads.
Source: Bank of America Merill Lynch