Cushing spurs wider spreads of Brent and WTI

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The price of the world’s two main crude oil benchmarks on Wednesday diverged by the widest amount since the depths of the financial crisis after a relentless rise in crude inventories at a US pipeline hub.

Brent, the European oil benchmark, traded at $5.90 a barrel more than US-based WTI at one point, a spread last seen in February 2009. Brent crude normally trades at a discount to WTI.

The blend of crudes from the North Sea made rare gains on its US counterpart a month ago as inventories at the WTI delivery point of Cushing, Oklahoma, began to grow sharply.

The US Department of Energy on Wednesday reported that Cushing inventories had risen for an eighth straight week to 37m barrels, an all-time high, damping spot prices as traders contemplated the reaching of storage limits there.

The International Energy Agency put Cushing’s operable capacity at about 41m-42m barrels, citing market sources.

The energy watchdog for western countries said that oil storage levels at Cushing along with fresh flows of Canadian crude into the central US “pressured prompt WTI prices”.

The temporary shutdown of a North Sea oil field called Buzzard has, meanwhile, kept Brent prices relatively steady, the IEA said.

WTI has also traded at an extreme discount to Light Louisiana Sweet, a US crude grade of a similar quality that is less subject to Cushing storage issues.

It was precisely because of erratic price movements in WTI that Saudi Arabia decided in October to drop the US benchmark as a reference for its sales in the US for the first time since 1994. It replaced it with a basket of crudes produced in the US Gulf of Mexico.

The increase in Cushing stocks pushed Nymex June WTI down by 72 cents to settle at $75.65 a barrel while ICE June Brent rose 71 cents to $81.20 a barrel.

Nymex June WTI futures were hit the hardest, pushing them more than $4 below the July contract, the widest discount since February 2009.

For investors who buy and hold commodity indexes such as the oil-heavy S&P GSCI, this discount is costly.

While many investment managers have devised strategies to work around this so-called roll-cost, “with a curve this steep, you can only minimise it, you cannot eradicate it. It clearly is a drag on returns while this persists”, said Sean Corrigan, at Diapason Commodities Management in Switzerland.

The steepness of the futures curve is, meanwhile, a windfall for operators of storage at Cushing as they can buy US oil at relatively low prices and lock in gains by selling futures. June 2011 WTI was on Wednesday at $87.70.

Elsewhere in the commodities markets, gold and silver prices soared on strong investor demand.

The rally has been supported by a rush of demand for coins and small bars from European investors, particularly in Germany, where there are fears of inflation in the wake of the €750bn eurozone bail-out agreed on Sunday night.

Spot gold hit an all-time high of $1,244.70 a troy ounce, up 1 per cent on the day. Silver rose 1.8 per cent to $19.61 an ounce, its highest level since March 2008.

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