New York, 16 August 2011

A major pipeline announcement means its just about time to lay on bets on the Brent-WTI spread narrowing. December 2013 looks attractive.

The lack of an underlying trade right now means trading the Brent-WTI spread is highly speculative and at risk to market sentiment. The restoration of a physical flow between these markets should make trading the spread less of a gamble. Valero has not confirmed or denied the report.

But should the company sign up for space on the 450,000 barrels per day line that would connect the WTI delivery point at Cushing, Oklahoma with Houston, Texas, it would bring the project much closer to fruition.

If enough shippers sign up for capacity, the line is due to start up in the fourth quarter of 2012, according to Enterprise Products Partners and Energy Transfer Partners, the two companies backing the project.

This summer has shown that even without direct links to the U.S. Gulf Coast, the wide spread between inland crude oil prices and Brent is enough to spur high enough refinery runs to eat into the region's crude oil stocks.

DECEMBER 2013 SPREAD

With Double E's 450,000 bpd of capacity added to the system arbitrage trade will certainly compress the Brent-WTI spread. Indeed, based on what has happened this summer where high refinery runs alone have cut Cushing stocks, it seems that Double E may well be enough to significantly narrow the spread to much nearer the cost of shipping crude on the pipeline --which is probably $2 a barrel or less-- than the $23 a barrel currently seen at the front of the curve.

And assuming the Keystone XL pipeline is eventually approved and placed into service in 2013 as planned there is a very good chance that fears of a glut at Cushing could be consigned to history for quite some time.

Of course, the risk is that Double E fails to go ahead or that the line takes longer than previously thought to build. But on balance there's a better chance today than there was yesterday that Double E will be built and that the U.S. Midwest will approach an equilibrium with seaborne crude prices.

Probably the best place to start looking at trading this spread is in 2013, with the more liquid December contracts probably offering the best place to be in case the trade has to be exited and less risk of trying to time the start-up of arbitrage trade.

Since May the spread between December 2013 Brent and December 2013 WTI has more than doubled to over $11 a barrel, far more than the cost of shipping crude by pipeline from Cushing to Houston. (Chart) Longer term, the resumption of a physical link between WTI and global crude prices will likely reverse the trend of investment flows going into Brent to capture the "global" oil price.

WTI, with a broad base of linked production looks like the more sustainable benchmark once again.

Ends --

By Robert Campbell, Reuters market analyst - for Commodities Now.

The views expressed are his own.