The spread between the August ICE Brent crude futures contract and the August New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) futures contract has topped $10 per barrel, as geopolitical and macroeconomic factors have swept Brent prices higher, while underlying physical constraints in the US central and southwest regions have kept NYMEX prices subdued, according to a report monitored by business a.m.
The calendar spread which measures the difference in price between futures for delivery has also reached more than $10 per barrel on the July contracts, however, liquidity is thin on July Brent, due to its expiry at the end of the day.
Calendar spreads reflect expectations about the balance between supply and demand in the physical market and are seen by many traders and investors as a more useful signal than spot prices.
The intra-day spread between the two benchmark contracts stood at $10.53 per barrel in London, the widest between the two contracts since mid-March 2015.
ICE Brent crude prices have been buffeted by geopolitical risk and macroeconomic factors over the past couple of months, a trend which continues as the contract has moved between $75 and $77 per barrel over the past day, on a weaker dollar but against the news of a potential increase of OPEC and Russian oil production.
The Permian Basin, the epicenter of the US shale boom in New Mexico and West Texas, has caught the attention of the futures market as growing supply there has led to severe pipeline constraints.
The number of active rigs in the Permian increased by 10 to 477 the week ending Friday, according to GE company Baker Hughes. The most rigs ever in the Permian were 562 set in late 2014. As production in the Permian grows and no new pipeline capacity is planned until the second half of 2019, supply bottlenecks have grown and increased discounts for physical grades pricing out of the region.
“The Midland-Cushing spread continues to come under pressure, trading back at a $12 per barrel discount after a brief recovery to around a $6 discount in mid-May. Limited pipeline capacity out of the Permian region should keep this spread wide into 2019,” ING analysts said in a note on Thursday.
Price discounts are expected to remain in double digits this summer as production will exceed takeaway capacity, industry officials told S&P Global Platts earlier in May.
