Despite the lack of incentive for shippers to send light sweet crude south to the USGC, Cushing inventories keep drawing and the extent of the May draws could surprise to the upside. We still expect to see flows on Marketlink reducing given the relative strength of WTI.
Even if May Cushing stocks draw by more than our estimated 1.5 mb, the draws will be in heavy grades rather than of WTI-quality crude. And it will only be the last barrel of WTI-quality crude drawn down that will lead to a steepening in the prompt WTI structure. Given that May cash WTI expired at 20 cents backwardated, WTI-specific operational minimums are unlikely in May.
As ever, anomalies on pipeline flows aside, the key catalyst for WTI's performance has to come from the USGC. Crude on water heading to the USGC seems lower m/m for June, as refineries start to return from maintenance. While USGC balances are grim, caught between now and the end of the year, the market seems to have forgotten about the summer months in between.
Even assuming that Saudi Arabia keeps its exports steady, between Venezuela, Colombia and Mexico, USGC imports could easily be 0.2-0.3 mb/d lower in the coming months as more heads elsewhere. Although by no means a given, lower Latam exports could reduce Q2 14 and Q3 14 USGC imports to 3.3 mb/d and 3.1 mb/d respectively. That would leave end Q2 14 stocks at 220 mb, still extremely high, but result in a 30-35 mb draw in Q3 14, taking stocks to below 190 mb.
Q4 14 USGC balances will still be dire and Q4 WTI time spreads look overdone, but shorting Q4 14 WTI time spreads as soon as prompt WTI rallies could be a slightly risky strategy, just like the risk reward of shorting prompt WTI appears very limited in our view. Patience will be key.