Does Brent-U.S. crude spread narrow or widen?

By Zaida Espana and Ikuko Kurahone

LONDON (Reuters) – The spread between the price of Brent and U.S. crude futures has narrowed to $10-$11 for the premium on the North Sea benchmark this week after widening to a record level of $17 a barrel at the start of March.

Commerzbank analysts said that while the premium of Brent over U.S. light sweet crude has corrected from “unsustainable levels” toward the current $10 a barrel, the spread remains high.

The current structure is a reversal of the historical relationship between the benchmarks, which typically saw U.S. light crude trading at premiums of $1-$2 over Brent.

By 1636 GMT, U.S. crude futures were 30 cents down to $104.49 a barrel, while and Brent futures were 8 cents firmer at $115.24.

The International Energy Agency (IEA), which advises a group of 28 industrialized nations, expects Brent to remain above U.S. crude into 2013 driven by increased interest from financial players in the Brent contract and because inventories at Cushing in Oklahoma are expected to remain high.

However, opinions vary among traders and analysts how far and when the premium will fall.

WIDER IN SHORT TERM – BUY BRENT VS SELL U.S. CRUDE

Weekly data from the U.S. Energy Information Administration (EIA) showed a higher-than-expected build of domestic crude oil inventories in the week to March 25. Stock levels at Cushing surged to a record high of 41.89 million barrels.

U.S. crude prices fell by more than $1 at one point following the data release, dropping more sharply than Brent.

“The builds in Cushing are oil coming from Canada and the Bakken, which is bad for the WTI-Brent spread. You’re going to see that widen,” Mark Kellstrom, a senior analyst at Strategic Energy Research and Capital LLC said.

Traders said the unrest in Libya and across North Africa and the Middle East would continue to support Brent.

“We expect two more weeks of Cushing builds. We also expect the Libyan situation to be a bit clearer in two weeks from now,” a trader said.

NAROWER BY YEAR END – BUY U.S. CRUDE VS SELL BRENT

Goldman Sachs expects the spread to narrow to $7 a barrel in the near term.

“We expect that WTI will remain volatile and prone to dislocations in the future,” Goldman Sachs analysts said in a research note. “However, we continue to expect that WTI-Brent will move back to near $7 in the near term.”

On a twelve-month horizon, Goldman sees the spread tightening to $3.50 a barrel as refineries ramp up.

Commerzbank expects the current level will hold until May and narrow toward $2 by the year end.

Barclays Capital’s Amrita Sen said the spread will narrow to zero by the end of the fourth quarter this year.

Sen said the strong refining margins in the PADD 2 area, which covers the MidWest, imply greater demand to process crude oil.

“The Brent-WTI spread will narrow as the year progresses,” Sen said. “We expect a pretty significant compression in the spread as the year progresses, in the fourth quarter, we see both benchmarks at $112 (a barrel) each.”

(Reporting by Zaida Espana, additional reporting by Ikuko Kurahone)

Does Brent-U.S. crude spread narrow or widen?