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26 February 2024

Merrill asks investors to dump WTI

By Shashank Shekhar

Investment advisory firm Merrill Lynch has called upon oil index investors to move to the London traded Brent due to the prevailing weakness at the WTI.

"Due to a flatter term structure, the Brent crude oil rolling futures strategies have experienced less negative roll returns than WTI strategies in recent months," it said in its recent report.

Brent futures have traded at a premium of almost $4 to $8 over Nymex crude futures in January.

On February 13, ICE February Brent traded at a record intra-day premium of $8.46 a barrel over Nymex crude for February delivery. Yesterday, while Brent futures stood at $ 45.88 a barrel – a premium of above $4 a barrel over WTI futures that stood at $41.68 a barrel

Under normal circumstances, Brent, which is considered a lower quality crude trades at a $1.50 discount against WTI. Merrill Lynch blamed the presence of "too much crude" in the United States as the reason for banal performance of WTI, which has been the traditional benchmark setter for oil the world over.

"Increasing Canadian oil sands production and declining rates in North Sea fields as well as in the GoM have placed Canada in the top foreign crude oil supplier to the United States. Virtually all Canadian oil exports are destined to the US. Oil pipeline flows cannot be easily reversed, so this continuous flow of Canadian crude can occasionally result in a major supply glut around the Nymex-WTI delivery point," Merrill Lynch said.

It said oil sand projects generate positive cash flows above $32 a barrel and thus the price of oil needs to fall down below this level to ease Canadian oil flow into the US and ease the glut of oil in the country. Furthermore, Cushing were most of the US oil gets stored is currently facing a glut due to storage constraints.

"The shortage of storage capacity around Cushing has elevated the cost of storage and forced the WTI curve into a marked contango with December 2009 and December 2010 contracts now trading at 21.6-per cent and 32.5-per cent premium, relative to the front March 2009 contract," Merrill Lynch said.

Although the Brent has also developed a contango structure, the different storage economics in the US and Europe have ensured that the difference between spot and future prices of Brent crude are less, it said.

Merrill Lynch said that Light Louisiana Sweet will remain a more relevant benchmark for crudes in the country as compared to WTI. "Despite the proximity to the WTI delivery point, waterborne LLS has not really suffered from the supply glut in the US Midwest.

"In the last two years LLS prices have remained a lot more linked to far-away Brent prices than to the nearby WTI," it said.