U.S. crude futures, also known as West Texas Intermediate (WTI), are based on crude delivered into the tank and pipeline system around Cushing, Oklahoma.
Futures prices are therefore very sensitive to anything that affects the regional supply-demand balance in the Midwest.
After the spill on Nov. 16, the calendar spread between WTI futures for delivery in January and July 2018 has surged from a contango of 2 cents a barrel to a backwardation of $1.17.
The six-month WTI spread is trading at the highest level since October 2014, a sure sign traders expect stocks around Cushing to tighten significantly after the pipeline outage.
U.S. crude prices have risen much more sharply than Brent in recent sessions, narrowing the big gap between the two that started to open this summer and reached a peak in early November.
U.S. crude futures for delivery in January are now trading only $5 a barrel below Brent, down from a discount of $6.70 earlier in the month.
In reality, the Keystone spill has accelerated an adjustment of Midwest stocks and prices that had already begun as traders responded to the huge price differential by routing more crude to the coast.
Cushing crude stocks rose steadily between the middle of August and the start of November, even as stocks declined in the rest of the country, especially on the U.S. Gulf Coast. ()
Stocks at Cushing increased in 10 of the 11 weeks between Aug. 18 and Nov. 3 by a total of more than 8 million barrels, U.S. Energy Information Administration (EIA) data shows.
By contrast, stocks in the rest of the country declined in seven of 10 weeks by a total of 14 million barrels (“Weekly Petroleum Status Report”, EIA, Nov. 22).
The contrast with the main refining centre on the Gulf Coast is even more stark, where stocks fell by 16 million barrels over the same period.
But stocks at Cushing have been stable since the start of October and declined by more than 3 million barrels in the first two weeks of November.
Even before the Keystone spill, WTI futures had moved from a broad contango in early October to nearly flat in November, reflecting the shifting supply-demand-stocks dynamic at Cushing.
Local oversupply was starting to clear and the pipeline outage will accelerate the process significantly.
Fully eliminating the glut will take time, but the opening of new pipelines from the Midwest down to the Gulf Coast in the first half of 2018 should facilitate the process.
As logistics constraints ease and the glut clears, the discount between WTI priced inland and seaborne crudes linked to Brent should continue to narrow next year.