Brent-WTI Oil Futures Spread Narrowest Since July

U.S. oil prices are rising as supplies that had been bottled up in the middle of the country start to reach refiners.

On Tuesday, oil on the New York Mercantile Exchange, the U.S. benchmark, settled at $92.16 a barrel, up 11 cents, or 0.1%, since March 1. Over the same period, the price of Brent crude, used to set the value of the majority of the world's oil, is down $3.55, or 3.2%, at $107.48 a barrel. The gap between the two is at its narrowest since July.

The convergence of U.S. and global oil prices comes as new pipelines break through bottlenecks that had kept oil produced in North Dakota, Texas and other regions stuck in supply depots across the Midwest.

Last week, operators of the Longhorn pipeline reversed its flow to send oil from west Texas to refineries along the Gulf Coast, diverting it away from supply depots in the U.S. Midwest, where stockpiles are near record highs. Later this year, the newly-expanded Seaway Pipeline is set to increase oil shipments to the Gulf Coast. And rail transport of oil has more than doubled over the past year.

"They are getting oil out of there, by hook or by crook," said John Kilduff, founding partner of Again Capital LLC, a New York energy hedge fund. New rail links, coupled with recent pipeline changes, have "really transformed" U.S. transportation infrastructure, he said.

Analysts and traders say that recent progress in relieving the supply glut is starting to translate into a shift in oil futures.

Nymex futures traded at a roughly $15 discount to Brent on Tuesday, down from $21 a month ago. That's still wide by historical standards, as the two contracts traded within a few dollars of each other before surging U.S. production caused domestic stockpiles to swell starting in 2011.

U.S. oil trades at a discount to compensate buyers for the higher cost of sending crude oil to refineries by rail or truck.

Now, as new pipelines begin bringing oil in the middle of the U.S. to refineries along the Gulf Coast, stockpiles in Cushing, Okla., a transport hub, are slipping. Last week, supplies at Cushing fell to 49.3 million barrels, the lowest since December and down from a record 51.9 million barrels hit in January, according to the Energy Information Administration.

"The spread is likely to continue to decline," according to Dominick Chirichella, analyst at the Energy Management Institute. In addition to falling Cushing stockpiles, maintenance work and unplanned outages have ended in the North Sea, he said, offering more supplies in the region where Brent's price is typically set.

Of course, some investors remain cautious about betting the spread will close anytime soon. Bill O'Grady, chief market strategist at Confluence Investment Management, which manages $1.7 billion, said it's not clear whether the latest pipelines and rail shipments will end the price disparity.

"Over the long run [the price gap] is going to close, we just don't have any indication on what the timing is going to be," he said, adding that his firm is betting on higher prices for both WTI and Brent.

Still, trading the so-called "Brent-WTI spread" has been one of the hottest wagers in the oil market. Many traders have bet on a steeper discount when the spread dropped towards $10 a barrel, then reversed their bets as the spread approached $20 a barrel.

Refiners are taking note. On Monday, Valero Energy Corp. said it won't try to sell its two California refineries. Instead, it is trying to bring in domestically-produced oil by rail, and is seeking permits to build a $30 million terminal at its Benicia refinery in northern California to take in 70,000 barrels a day of oil produced in the middle of the country.

Valero's move is the latest in the industry's turn to rail shipments. In 2012, 233,811 carloads of crude oil were shipped by rail, according to the Association of American Railroads, more than three times the 65,751 carloads in 2011.

Front-month April reformulated gasoline blendstock, or RBOB, settled 8.38 cents, or 2.7%, lower at $3.0451 a gallon. April heating oil settled 6.26 cents, or 2.1%, lower at $2.8641 a gallon.

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

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