Tight Supplies Push Brent Up; U.S. Crude Falls

Tight supplies of crude from Europe's North Sea Monday boosted the price of Brent futures, the continent's benchmark contract, while the U.S. oil benchmark posted a loss.

The pair rarely diverge in price direction. But traders pushed Brent prices higher as a heavy schedule of maintenance will crimp the region's production next month, especially at Nexen Inc.'s 200,000 barrel-a-day Buzzard field.

That comes on top of "severe underperformance" of other North Sea fields producing crude, according to a report by Bank of America Merrill Lynch.

The Bank Of America report, entitled "Brent tight as a drum," added that "extremely tight physical market in the North Sea" is the "key driver" of supply shortfalls and higher prices for Brent.

Brent oil futures for September settled up 65 cents, or 0.6%, higher to $113.60 per barrel, while front-month U.S. benchmark--West Texas Intermediate or WTI--settled down 14 cents, or 0.2%, at $92.73 in choppy trading.

The fact that Brent rose while WTI fell highlights the increasing price gap, or spread, between both the oil benchmarks. The spread has risen to $20.87. That's the biggest gap between between the two in nine months--or since $22.16 on Oct. 20.

Brent has risen at a greater rate due to supply issues and rising tensions in the Middle East.

The Brent market is by nature more vulnerable to Middle Eastern developments than the WTI market because Europe imports comparatively more of its crude from the Middle East than does the U.S. The fear is that Iran will make good on frequent threats to disrupt the region's oil supplies over Western sanctions on its nuclear program. That anxiety touches on everything from the current turmoil in Syria, an Iranian ally, to Tehran's sharp rhetoric about Israel, Iran's foe.

"Brent is going to be more reactive" to developments from that region, said Phil Flynn, an analyst at Price Futures Group.

Brent has risen 23% since mid-June, when Mideast fears began to boil again over Iran's military exercises in the Persian Gulf. Since the same point, WTI rose only 14% over the same span.

The supply situation is much brighter for the U.S. than Europe. The U.S. has been expanding its oil production by using new drilling techniques to extract oil from the nation's shale formations--and it also has easier access to crude from such major oil exporters as Canada, Mexico and Venezuela.

"Out of the two, the supply situation is much tighter for Brent," said Matt Smith, an analyst with Summit Energy.

Two news reports out of the Mideast ratcheted up worries about the region. Israeli newspapers reported that the Israeli army began testing a nationwide alert system for warning the public of an imminent missile attack--after reports that Iran had made progress towards developing a nuclear warhead, according to news agency Agence France-Presse, or AFP.

AFP also reported a U.S. guided-missile destroyer collided with a Japanese oil tanker near the Strait of Hormuz, through which a third of all water-borne crude moves. No one was hurt and the ship is able to operate, but the report raised fears given the heavy presence of U.S. ships in the area.

Still, Mr. Smith doesn't expect the spread between WTI and Brent to continue to widen in the upcoming days.

He said that if the spread moves much wider, exporting U.S. oil to Europe, to fill the Brent shortfall, will become profitable. Mr. Smith said that is what happened last October, when the spread hit $24.46--before quickly plunging lower after more tankers arrived to ship oil to Europe.

Front-month reformulated gasoline blendstock, or RBOB, settled at a $2.990 a gallon, down 1.32 cents. Front-month heating oil settled at $3.018 a gallon, down 0.22 cents.

Copyright (c) 2012 Dow Jones & Company, Inc.


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Brent Crude Oil : $51.78/BBL 0.77%
Light Crude Oil : $50.85/BBL 0.83%
Natural Gas : $2.99/MMBtu 4.77%
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