U.S. crude futures jumped 1.4% to climb above $97 a barrel Monday, as traders cashed in on bets that the price gap between the world's two crude benchmark would widen, traders and analysts said.
Brent futures, the European benchmark, hit an eight-month high of $118.92 a barrel last Friday, which pushed its spread with the U.S. benchmark of West Texas Intermediate, or WTI, to $23.18, the biggest gap in 11 weeks. WTI moved higher as some investors took profits after betting that spread would widen by wagering Brent futures would rise while WTI fell, says Kyle Cooper, managing partner at the Houston-based consultancy IAF Advisors.
"Last week, the Brent market was hot, and WTI was not," said Tim Evans, analyst at Citi Futures Perspective in New York. "Everything is swinging today back in the other direction."
West Texas Intermediate light, sweet crude for March delivery settled $1.31 higher at $97.03 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled 77 cents, or 0.7%, lower, at $118.13 a barrel, pulling back from an eight-month high it hit on Friday. The price gap shrank to $21.10.
The two crude benchmarks have traditionally traded within a few dollars of each other, but Brent has risen sharply against WTI over the last two years because a glut of oil has developed in Cushing, Okla., where the WTI contract is settled. Crude from newly discovered shale formations in Canada and the Midwest has pooled in Cushing, which lacked the sufficient pipelines to carry the oil to the refining complex along the coast of the Gulf Of Mexico.
This has weighed on WTI prices, while Brent is free of such concerns. The price gap hit a high of $27.88 in October 2013. However, the spread shrank to below $16 earlier this year when the capacity of the Seaway pipeline, which carries crude from Cushing to the Gulf, was increased from 150,000 barrels a day to 400,000 barrels a day.
But U.S. oil prices have been declining since Feb. 1 due to problems with the Seaway pipeline, which cut its capacity to the terminal at the end of the pipeline to 175,000. Fears of a growing glut again pushed U.S. prices down--and prompted bets that the spread between Brent and WTI would diverge.
Whether WTI can sustain Monday's rally will depend on oil supply data released by the U.S. Energy Information Administration on Wednesday, traders and analysts said. If weekly crude-oil stockpiles fall more than analysts expect, "that might provide an impetus for prices to move higher," Cooper says.
A stronger euro also supported U.S. oil prices as the weaker dollar makes dollar-denominated crude less expensive for buyers of other currencies. The euro rose against the dollar after Jens Weidmann, European Central Bank member and president of Germany's central bank, said the euro was not seriously overvalued.
Front-month March reformulated gasoline blendstock, or RBOB, settled 3.76 cents, or 1.2%, lower, to $3.0212 a gallon. March heating oil settled 0.7 cent, or 0.2%, lower, to $3.2315 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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