HardAssetsInvestor

Written by Sumit Roy  |

February 06, 2012

Market Alert: Brent Breaks Out Above Key Resistance, WTI-Brent Spread Blows Out Again

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Oil market begins to heat up, and so does the price spread between the two benchmarks.

Prices for the crude oil benchmark, Brent, broke above the key $115 resistance level today. Brent is now at the highest levels since Nov. 8 and today's closing price is the highest in six months.

The coming days will confirm whether this breakout can sustain itself, but given the positive sentiment in financial markets, the move likely will be confirmed and a push toward $120 is now in the cards.

But while Brent hit multimonth highs, the other major oil benchmark, West Texas Intermediate (WTI), fell again today.

Prices for WTI are sitting near six-week lows, pressured by rising inventories in the Midwest region of the United States. In turn, the spread between WTI and Brent is once again ballooning, having hit $19 today, the widest level since Nov. 8.

The large spread between WTI and Brent has persisted since early 2010. The culprit has been an oversupply of crude oil at Cushing, Okla. — the delivery point for NYMEX WTI futures contracts — as well as the broader Midwest region. A lack of infrastructure trapped the crude in the region, precluding the oil from being transported out of the area and into other higher-priced destinations.

In recent months we’ve seen the spread fluctuate wildly. It hit a record $28.08 on Oct. 14 before rebounding significantly to as low as $6.82 on Jan. 3 amid news that the Seaway pipeline would be reversed.

Enterprise Products Partners, the pipeline’s operator, anticipates the first phase of the reversal to happen by June. Initial capacity will be 150K bbl/d. The rest of the 400K bbl/d total capacity is scheduled to be reversed by early 2013.

Nevertheless, plunging demand in the U.S., which hit the lowest level since 1999 last week, has raised the need for even more takeaway capacity, particularly as oil production in the Midwest continues to surge amid an unconventional oil boom in the region.

The futures market sees the spread persisting for at least the next few years: