Spot crude oil prices in the US are rallying again and the US crude oil market is displaying uncanny strength so far this year. Flat WTI prices have rebounded back up above $96/bbl, while the WTI-Brent arb firmed to $11.20/bbl. Regional grades around North America are strengthening, breaking out to the upside .

According to Bank of America Merrill Lynch, domestic market tightness could continue for a few weeks and it is expected that WTI could cross $100/bbl in the very short term, as the ramp-up of the Keystone Gulf Coast project could lead to Cushing draws. Yet, much of this recharged strength relates to very low US import levels, a reflection of LLS weakness in 4Q13. With a rebound in US oil prices on the way, a surge in imported barrels may come just as a heavy refinery maintenance season kicks in.

Abnormally frigid weather conditions across the Midcontinent, Texas and the Northeast have clearly hindered some domestic production in December and January, with the YoY growth rate falling to 16% currently from as high as 18.5% in November. At the same time, domestic demand remains firm. Crude oil runs are sitting at record seasonal highs of 15.7 million b/d as margins are supported, in part due a drawdown in distillate inventories on the surge in heating demand. The weather also impacted some refineries, especially in Joliet, Illinois, Detroit and Memphis, but throughput remains high by historical standards.

According to the estimate carried out by Bank of America Merrill Lynch, Cushing draws are thus likely to resume as the Gulf Coast pipeline ramps up. Assuming initial flows run at just over 300 thousand b/d, as some sources at Trans Canada have hinted at, the pipeline in isolation could account for gross draws of at least 11 million bbl from Cushing by the end of February. Of course, some of these draws will likely be balanced by greater deliveries into Cushing, particularly via the existing Keystone line from Canada. Throughput on the Keystone Cushing Market Link will likely pick up only gradually through the rest of the year. Undoubtedly, this can provide significant support to WTI prices and timespreads near term and it is expected that WTI could cross $100/bbl over the next few weeks.
Source: Bank of America Merrill Lynch