Extract from crude oil:
As Cushing resumed builds, this time 1.2 mb higher w/w to 36.5 mb, exactly how much the hub will build and where this takes WTI-Brent spreads continue to be hot topics. Although we have discussed this in detail over the past few weeks, we summarise our thoughts here, as the recent fall in oil prices has now started to raise questions around US production and what it could mean for Cushing balances. With the deluge of crude headed to the crossroads of Oklahoma from the Permian, Rockies and local production growth, we have begun to see large incremental inflows. This is largely due to the start-up of a web of new pipelines that have directly or indirectly begun to influence Cushing balances, bringing production from various basins into the hub. The start-up of pipelines such as Sunrise and the expansion of Pony Express is blatantly bearish for Cushing balances, as these works will result in a net rise in inflows to the hub. The pressure on Cushing stocks will have major implications on WTI-Brent spreads in 2019, affecting how wide they could go. There are two major inflection points that will be key drivers for the spread. The first is in H1 19—with no new planned pipelines out of the hub, there is little relief from the builds, which implies a further widening in WTI-Brent spreads. One risk to this forecast, however, is the potential for incremental flows on Marketlink, which has recently announced an open season for additional space on the line. Another risk to wide spreads would be a major fall in flat price—but assuming Brent recovers if OPEC+ manages to cut production, the infrastructure constraints out of Cushing could cause the hub to disconnect once again. This would cause WTI-Brent to blow out, possibly to -$15 or more. The second inflection point will be in H2 19, once additional Permian pipelines come online. These pipes will likely steal barrels from Cushing, sending them to the USGC directly, as committed space on the new pipes will outnumber the amount of new production expected to come online in the Permian by nearly 0.8 mb/d (when comparing exit rate 2018 versus 2019 growth). In this scenario, we could see pressure taken off the hub, and spreads could again narrow. But a lot of the trajectory for Cushing balances depends on the US production growth profile, given the recent price collapse.
Extract from oil products:
US gasoline stocks fell by 0.8 mb w/w to 224.6 mb, with PADDs 1 and 3 reporting weekly draws of 0.6 mb and 0.9 respectively. Overall inventories remain 10.4 mb above levels seen last year, with PADDs 1 and 3 inventories higher y/y by 5.0 mb and 5.9 mb respectively. USGC gasoline prices continue to trend weaker, with plenty of selling interest for prompt cycle 68 along the Colonial pipe. As a result, line 1 space has rebounded from last week’s free fall, increasing by 1 cent per gallon w/w, but well off the two-year high set on 16 November. This rebound has kept the arbitrage from the USGC to the USEC open for RBOB, CBOB and conventional 87-octane gasoline. Despite weak USGC gasoline prices, the arbitrage to ship CBOB from the USGC to the Midcon slammed shut for the first time since mid-October, after prices in Group Three plummeted as regional refineries ramp up operations after a hefty maintenance programme. US regular gasoline prices were 1 cent higher y/y at $2.54 per gallon in the week to 26 November.