Rising U.S. oil production, coupled with the Permian pipeline capacity constraints, are set to lead to a build-up in Cushing, Oklahoma, inventories that will put further pressure on the benchmark U.S. oil price, widening its discount to Brent Crude to as much as $15 a barrel—which would be the widest WTI discount to the international benchmark since December 2013, according to Citigroup.
“As U.S. production grows, the likelihood is overwhelming that a lot of the valves to get into the Gulf Coast are going to close,” Ed Morse, global head of commodities research at Citigroup, told Bloomberg in a recent interview.
Before the planned pipelines in the Permian enter into service by the fourth quarter of 2019, the inventories at Cushing could rise to 70 million barrels by April next year, compared to 20 million barrels in stockpiles now, according to Morse.
While Permian oil is finding it increasingly difficult to get to the U.S. Gulf Coast, the route to Cushing is not as constrained. This would push inventories higher and widen the WTI Crude discount to Brent Crude, Morse told Bloomberg.
As of 2:21 p.m. EDT on Tuesday, the discount of WTI Crude to Brent Crude was at $9.59 a barrel.
Over the past two months, the WTI discount to Brent has surged and doubled since the middle of July. On the one hand, WTI prices are depressed by Permian takeaway capacity constraints. On the other hand, Brent Crude has been increasing thanks to the drop in Iranian oil exports and expectations of further losses of Iranian barrels combined with OPEC’s inability to fully offset those losses.
According to preliminary tanker tracking data compiled by Bloomberg, observed exports of Iranian crude oil and condensate plunged in September to 1.72 million bpd, down by 260,000 bpd month-on-month and the lowest level since February 2016.
By Tsvetana Paraskova for Oilprice.com
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