“Domestic production keeps rising, but it may have reached a point where increasing amounts of barrels of crude oil are becoming stranded,” said John Kilduff, a partner at Again Capital in New York.
West Texas futures have been under pressure as US production keeps rising. In the most recent week, it hit 10.8-million barrels per day (bpd), a new weekly record, though those figures are less reliable than lagging monthly figures.
Brent crude futures for August rose 46c on the day to $78.25 a barrel, while US West Texas Intermediate (WTI) crude was down 60c to $67.59 a barrel. At one point, the premium for Brent over WTI surpassed $11 a barrel, the largest spread since March 2015. The spread has doubled in less than a month, as a lack of pipeline capacity in the US has trapped a lot of output inland.
“The Brent/WTI is blowing out. I think there must be what looks like some capitulation going on in the spread between those two contracts,” Saxo Bank senior manager Ole Hansen said. The wider premium makes US crude exports more competitive than those linked to the Brent price, such as North Sea or West African grades of oil.
Brent had hit a three-week low below $75 a barrel on Monday after Opec and its non-Opec allies, including Russia, indicated they could adjust their deal to curb supplies and increase production. Opec and non-Opec producers have committed to cut output by 1.8-million bpd until the end of 2018, but are ready to make gradual supply adjustments to deal with shortages, a Gulf source familiar with Saudi thinking told Reuters late on Wednesday.
This news helped boost Brent as it suggests a slightly less committal approach to adding barrels to the market.
Sources told Reuters last week that Saudi Arabia, the effective leader of Opec, and Russia were discussing boosting output by about 1-million bpd to compensate for losses in supply from Venezuela and to address concerns about the impact of US sanctions on Iranian output.
“The fact that we saw the Saudi/Russia announcement last week could have attracted some interest in narrowing the spread, given that we were looking for some of the geopolitical risk [in Brent] to be removed, but that’s been overtaken by the domestic widening in crude prices in the US,” Hansen said.
Prices for physical barrels of US light sweet crude delivered at Midland are at their largest discount to the benchmark US futures price in almost four years. Concerns about US bottlenecks are contributing to the decline in US futures as well.