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Goldman Bets on Rising Crude Oil With Surging U.S. Supply: Energy Markets

Published: February 24, 2012 | 12:12 pm
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The highest U.S. oil production in nine years is failing to dissuade Goldman Sachs Group Inc. (GS) from predicting that the price of the country’s most-traded crude will keep climbing.
The New York-based bank says West Texas Intermediate will gain 7 percent by August to trade within $5 a barrel of North Sea Brent, even as rising output swells the nation’s inventories. Citigroup Inc. (C) takes the opposite view, forecasting that WTI’s discount to Brent may widen to $20 a barrel this year, from about $15.79 yesterday.
“There’s a danger in trading the Brent-WTI spread right now with any strong fundamental conviction,” Olivier Jakob, managing director at Petromatrix GmbH, a Zug, Switzerland-based oil researcher, said in a phone interview yesterday.
The outlook for WTI is being clouded by a deluge of oil to Cushing, Oklahoma, the delivery point for WTI futures, amid a production boom that has cut America’s dependence on imports to a more than-10-year low. The logjam is likely to be relieved in June, when flows through the Seaway pipeline are reversed, giving producers in Canada and North Dakota direct access to refineries on the Gulf coast, according to Goldman Sachs, which correctly forecast Brent would decline in April last year and recover the following month.
Crude oil for April delivery rose as much as 0.8 percent to $108.70 a barrel in electronic trading today on the New York Mercantile Exchange, bringing its gain this year to 9.8 percent.
Brent oil for April settlement increased as much as 0.5 percent to $124.28 a barrel on the ICE Futures Europe exchange in London, an advance of 15 percent this year.

Seaway Flows

“The spread between WTI and Brent will narrow with the reversal of the Seaway pipeline,” David Greely, the New York- based head of energy research at Goldman Sachs, said in a report on Feb. 22. “With the Seaway flowing from Cushing to the U.S. Gulf Coast, we expect WTI prices will be closely tied to Brent prices, with WTI likely trading at a $3 to $5 discount.”
WTI’s discount to Brent widened to a record $27.88 on Oct. 14 last year as U.S. oil shale production boosted supplies to Cushing while the uprising against Muammar Qaddafi choked off exports from Libya, driving up the European benchmark grade. The average in the past nine years is $1.33.
Forward curves, which show monthly futures prices through to the end of the decade for the two grades, currently indicate that WTI will remain below Brent until at least 2020, according to data compiled by Bloomberg.
U.S. oil production rose 3 percent last year to an average of about 5.65 million barrels a day, the highest level since 2003, according to Energy Department data. Output will grow a further 61 percent to 9.1 million barrels a day in 2015, the most since the 1970s, Raymond James & Associates said in a report on Feb. 13.

‘Not Keeping Pace’

“The U.S. is choking on crude,” Seth Kleinman, the global head of energy research at Citigroup in London, said in a phone interview. “There are points where the infrastructure build-out is just not keeping pace. Can Seaway clean up Cushing? Seaway can tighten the arbitrage, possibly, in the short-term. But in 2013, there’s going to be another 500,000 to 800,000 barrels a day of oil.”
Much of the new North American oil production “will remain landlocked, and therefore heavily discounted,” Kleinman said in a Feb. 15 report. Infrastructure won’t catch up until “mid- decade at the earliest, and perhaps not until much later.”
Enterprise Products Partners LP (EPD) and Enbridge Inc. (ENB) said on Nov. 16 that they would reverse flows through the 500-mile (805- kilometer) Seaway link from June. That may initially divert 150,000 barrels a day out of the region, and then as much as 400,000 a day early next year, helping to clear the surplus that has depressed WTI in relation to Brent, Goldman Sachs said.
“The risk-reward over the next several months favors a long position in the WTI contracts following the reversal of the Seaway pipeline,” Greely said.


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