February 14, 2011 / 9:41 AM / 7 years ago

Brent premium could be the new norm in oil markets

NEW YORK/LONDON (Reuters) - Oil traders are almost unanimously betting that Europe’s Brent crude will retreat from its record $16 premium over U.S. benchmark oil. What they don’t expect for years, however, is a return of West Texas Intermediate premiums that have been the norm for decades.

Shifts in physical oil flows and new supply risks -- increasing the chance of oil gluts in the U.S. Midwest and tighter supplies in Europe - mean that a highly unusual $5 to $10 a barrel premium for Brent could become the standard through 2013.

It’s not the first time Brent has achieved wide premiums. WTI plunged to discounts near $10 a barrel for several brief periods in 2009, as traders sold off the contracts near their expiry dates due to sparse storage space in Oklahoma.

But this time could be different, traders and analysts say, with Brent sustaining a longer-lasting, structural premium.

Ample new oil storage capacity is being added to WTI’s landlocked delivery hub in Cushing, Oklahoma. That means discounts are now less a function of tight storage capacity and more reflective of record volumes of shale oil and oil sands crude flowing in to create a supply cushion that may not be drawn down until new pipelines can siphon crude off to the Gulf Coast.

“A Brent premium is the new normal in oil markets,” said Ed Morse, head of commodities research at Credit Suisse. “It’s a combination of the ample supply situation in PADD II (the U.S. Midwest) and Brent’s market tightening. WTI’s once normal premium is over.”

Until new pipes link Cushing to the coast around 2013, Europe’s benchmark may sell for an average $5 to $8 a barrel advantage, Morse said, roughly reflecting the cost of moving barrels from Cushing to the coast by railroad or tanker truck.

Traders are resorting to these more expensive modes of crude transport to cash in on a regional arbitrage. Railroad shipments are already experiencing a boom.

The Brent and WTI futures markets are already pricing in a premium of more than $3 for the London-traded crude through most of 2012.

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