Was hoping to do this in 1 part, but it is going to be a 2 part post
First I think we need to establish the fact that there are 2 sets of fundamentals going on…one for WTI and one for Brent.
Most tend to lump these in one category: OIL
But they are most certainly independent of one another.
First, let us take a look at the WTI market
Trump has been on a twitter rampage to try and provoke/coerce OPEC to pump more oil…the problem, however lies more domestically than internationally
There are several reasons for the recent price spike in the WTI contract (backed off since then, but we have to start somewhere)
- Iran Sanctions
- US Steel Tariffs
- Syncrude supply disruption
- Permian bottleneck
- Months of falling imports of sour crude from KSA for Motiva
- VZ disaster
- TransMountain pipeline
#1 I think is self explanatory
#2. 97% of US well pipe is imported because US Steel mills are not tooled for this kind of pipe…Trump administration continues to deny oil companies waivers, even on pre-existing purchases, adding billions to already inflated budgets
#2 before the Syncrude news came out we saw an explosive upside in near month spreads
this is why I always say: watch the spreads…they are telling you something
- Permian bottleneck is causing a huge differential in Midland v WTI spread, therefore buoying the WTI price
- KSA, instead of importing sour crude to mix with light crude for their Motiva refinery (largest in the US) they took to drawing on Cushing sour stocks (what they could do, without even increasing production, is increase imports to the US and alleviate the draw on US domestic supplies) (Trump may want to give me a call)
Here is where we hit the heart of the problem and why the spreads started blowing out front month wise ..Cushing..it is all about Cushing ,the actual $CL_F #WTI contract that you are all trading . (OPEC can’t fix this with more production)
- VZ self explanatory
- TransMountain self explanatory.
So, what options does the US have at this point? Blaming OPEC is ridiculous…
- Soften up on Iran Sanctions (this has been alluded to in the media already by the administration)
- Allocate waivers for pre-existing purchases of well pipe
- Syncrude supply disruption: in actuality, this frees up some of the congested pipeline capacity from CA to US, to ship WCS (funfact: Citgo refineries have been experimenting with using WCS instead of VZ oil for over a year now…they are more prepared than you think)
- Permian is trying to add pipeline capacity as fast as they can, but will take some time (2019). Rail is expensive and there is a truck driver shortage…larger companies that have access to better transportation (contracts) will fare better than smaller companies at this point.
- VZ unfortunately is a lost cause, import WCS as a replacement
- Syncrude disruption should have alleviated some of the bottleneck allowing for more WCS …but this pipeline must be built
Stay tuned Brent update