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Asian Petroleum Review : Jan-March 2011
37 Near-record inventories at Cushing and across the rest of the Midwest are again driving a wedge between U.S. oil futures based on land- locked crude such as West Texas Intermediate (WTI) and Brent futures based on the international seaborne market. Brent blend and domestic crudes deliverable against the NYMEX contract are essentially identical. Brent is in fact good for delivery against NYMEX at a 30 cent discount, reflecting its marginally lower average qual- ity. So prices for Brent and NYMEX-deliverable crudes such as WTI should move in tandem - - with NYMEX commanding a slight premium reflecting its lower sulphur content and higher-yield of gasoline-making components that make it more desirable for U.S. re- finers. But in the last four months of 2010, NYMEX moved to an increasing and unusual discount to Brent, reaching $6 per barrel this week, the widest discount since January 2009. As in previous episodes, the NYMEX discount reflects geographical rather than quality differences. Extensive and prolonged refinery shutdowns between September and November caused an enormous build-up of crude across both the PADD III Gulf Coast and PADD II Midwest refining regions compared with the seasonal norm. Refiners along the coast have subsequently drawn down 33 million barrels through record runs, deflecting the arri- val of foreign crude imports before the year-end. Land- locked refiners in PADD II, by contrast, have less flexibility and been unable to stop the flood of Canadian crude down the pipeline system to the Midwest, resulting in a record glut of crude in the region by the end of 2010. PADD II, PADD III Contrasting stock movements in the closing months of the year - - with inventories rising in PADD II and drawing in PADD III - - are normal. But the combination of unusu- ally high crude and product inventories at the end of the summer driving season and prolonged run cuts to reduce them has left the Midwest bloated with crude. At the end of December, crude inventories filled 68 per- cent of all working storage capacity in PADD II, based on a new survey published by the Energy Information Ad- ministration (EIA), the statistical arm of the U.S. Depart- ment of Energy. Thomson Reuters Asia Petroleum Review JOHN KEMP ON THE MARKET Midwest storage squeeze pressures WTI LONDON