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Brent-WTI oil gap spooks refiners.

After almost three years of churning bumper profits from the massive price gap between the world's two most actively traded crude oil contracts, traders, refiners, railways and investors are all asking the same question: Is the game finally coming to a close?

The near $20 premium North Sea Brent held for much of 2012 over US benchmark West Texas Intermediate (WTI) has fallen to less than $8 a barrel, the lowest since the crude-by-rail boom began to gather steam in early 2011.

The collapse in what oil traders call the Brent-WTI spread could now threaten the vast investments made by rail and refining companies to try and move lower priced crudes to higher priced markets, as the key spread trades far below the $10-$15 a barrel level many based their business plans on.

The spread has narrowed as traders bet increased pipeline capacity will help move crude to the Gulf Coast in the second half of this year.

In earning calls, analysts and investors have hounded refining and rail executives with questions about what a collapse in Brent-WTI could mean for their bottom line.

Most executives were unbowed, arguing a "short-term" move in the spread wasn't going to slow them down, even as oil future prices suggest it could stay below $10 a barrel for the rest of the year.

The issue, they say, is not that the game is over, but that the rules have changed. As the pipeline bottleneck that separated WTI's delivery point in Cushing, Oklahoma, from the Brent-dominated global marketplace starts to ease, the Brent-WTI spread is no longer a particularly accurate reflection of the cost of moving crude to the coasts.

Instead, the oil industry now has dozens of new rail terminals and thousands of tank rail cars that can carry more than 1 million barrels a day (mbpd) of crude to every corner of the US. It costs more to ship oil by rail than by pipeline and each rail route has its own costs and potential profits. For traders and investors, however, the opaque nature of the crude-by-rail business makes it difficult to know who is still on the winning side of the trade.

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Publication:Oil & Gas News
Date:May 20, 2013
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