US oil premium rises on shortage as OPEC uncertainty persists

OPEC. (Reuters pic)

SEOUL: US oil for near-term delivery rose to the highest level since 2014 versus cargoes for later on speculation that America faces a supply crunch while uncertainty lingered over OPEC’s planned output boost.

August futures in New York were about a $1 higher than the September contract, in a market structure known as backwardation that signals a shortage. Inventories at the key US storage hub in Cushing, Oklahoma, are seen sliding for a sixth week and the nationwide hoard is forecast to have fallen for a third week. A Canadian oil-sands outage could lead to a North American crunch for all of July and drain stockpiles, according to Goldman Sachs Group Inc.

Investor focus is shifting to the inventories as Goldman predicts the decline in Cushing will have a stronger impact on the oil market than the ambiguous deal between OPEC and its allies to raise output. The group’s plan to lift production “ may be a little short” of what’s required to prevent a price spike, US Energy Secretary Rick Perry said.

Canada’s oil-sands outage is “likely to drive some tightness in the North American market,” said Daniel Hynes, a senior commodities strategist at Australia & New Zealand Banking Group Ltd. “I would expect the backwardation to persist indefinitely. Certainly, while the market remains tight.”

Backwardation deepens
West Texas Intermediate crude for August delivery rose as much as 45 cents to $68.53 a barrel on the New York Mercantile Exchange and was at $68.44 at 7:48 am in London. The September contract was at $67.38. Total volume traded was about 26% below the 100-day average.

Brent futures for August settlement was up 19 cents to $74.92 a barrel on the London-based ICE Futures Europe exchange. That’s a premium of only 16 cents to the September contract, a much smaller backwardation than in the US market.

WTI and Brent both slipped on Monday after Saudi Arabia and Russia pledged to keep prices under control by restoring production. Oil chiefs from the world’s top two crude exporters indicated that last week’s 24-nation accord will add 1 million barrels to daily supplies, more than the 700,000-barrel figure cited by several other members of the Organization of Petroleum Exporting Countries. Goldman said even an aggressive output increase will lead to only a slim surplus.

Brent vs WTI
Still, the Saudi-led drive to pump more has weighed on London’s Brent crude, narrowing its premium to US oil. The spread between the European and US markers shrunk as much as 31% on Monday and has almost halved this month, with global benchmark Brent trading at a $6.48 premium to WTI, compared with over $10 a barrel last week.

Shrinking US stockpiles and the shutdown of a key oil-sands facility in Canada have also been causing a ruckus in American oil prices.

US crude stockpiles are estimated to have declined by 2.5 million barrels last week, while inventories at Cushing fell by 1.3 million barrels, according to a Bloomberg survey before the Energy Information Administration’s data Wednesday.

A key piece of equipment at Syncrude Canada’s oil-sands complex in Alberta halted operations last week after a transformer blast shut the entire 350,000 barrel-a-day facility. The expected shortfall in supplies follows five consecutive weeks of shrinking inventories at Cushing, the delivery point for WTI contracts, and Goldman said a shortage at the oil-storage hub could worsen.

Syncrude is conducting an assessment of the disruption, after which it will look to provide a recovery path, the plant controller Suncor Energy Inc., said.

“The facility produces light, sweet Syncrude which is primarily processed by US Midcontinent refiners,” said Victor Shum, a Singapore-based vice president at industry consultant IHS Energy. “These refiners will have to quickly find replacements for the lost light, sweet Syncrude volumes. The market is pricing this in.”

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