Front Month WTI Oil at Risk of Melt Up
Front month West Texas Intermediate (WTI) oil is at risk of a “melt up” in the first half of 2022, according to a new BofA Global Research report, which was sent to Rigzone on Monday.
“Unlike Brent, the WTI contract has a physical delivery mechanism, which forces convergence between the physical market and futures market every month,” the report stated.
“In April 2020, this convergence was on full display ahead of the May WTI contract expiry, as longs with no ability to take delivery were forced to liquidate their positions at negative prices. Now, the market setup has reversed,” the report added.
With inventories at very low levels there is likely a reduced ability to make delivery against the WTI contract, the report noted, adding that inventories will likely scrape along at low levels “as a result of limited U.S. supply growth over 1H22 and limited incentives to send barrels to Cushing”.
“Given the market is desperately short barrels in the near term, we see increased risk of a short squeeze as WTI moves towards expiry each month,” the report stated.
“Furthermore, we see risk that WTI strengthens relative to other North American grades to encourage more oil to flow to the hub,” the report added.
In its latest energy report, BofA noted that it previously highlighted that Cushing balances would be tight in the first half of this year due to limited crude oil production growth and strong refinery and export demand. “Now, the Ukraine conflict presents the risk of even greater tightness,” the report stated.
The BofA report said inventories at the trading hub have drawn roughly 13 million barrels year to date, reaching 24 million barrels last week. This is the lowest seasonal level in the shale era, the report noted.
According to a U.S. Energy Information Administration graph stretching back to April 2004, the highest weekly Cushing ending stocks in the last 18 years, excluding the Strategic Petroleum Reserve, were seen in the beginning of April 2017, at 69.42 million barrels. The lowest, according to the graph, were seen in the beginning of April 2004, at 11.67 million barrels. In the week of May 1, 2020, this figure hit 65.44 million barrels, the graph showed.
At the time of writing, the price of WTI stood at $111.05 per barrel. The commodity has fluctuated over the past few weeks, closing at $95.72 per barrel on February 28, $123.7 on March 8 and $95.04 per barrel on March 16.
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