Brent Oil Falls Below $105 on Libya Talks; WTI Discount Shrinks

Apr 02, 2014 4:12 pm ET

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April 2 (Bloomberg) -- Brent fell below $105 a barrel for the first time since November as eastern Libyan rebels said they have an “accord in principle” to reopen oil ports. West Texas Intermediate’s discount to Brent slipped to a six-month low.

The front-month Brent contract, which has been more expensive than the second month on a closing basis since early November, erased most of its premium and moved into contango for part of the day. Libyan output slumped to 250,000 barrels a day last month from 1.4 million a year earlier because of unrest, according to a Bloomberg survey. The spread between Brent and WTI at settlement shrank to the narrowest level since Oct. 2.

“The Libya news is front and center,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “It was a matter of time before there would be a political accommodation that would allow for Libyan crude exports. It now appears that’s about to take place.”

Brent for May settlement fell 83 cents, or 0.8 percent, to end the session at $104.79 a barrel on the London-based ICE Futures Europe exchange, the least at closing since Nov. 7. The European benchmark grade settled at a $5.17 premium to WTI. The volume of all futures traded was 62 percent above the 100-day average at 4:11 p.m.

WTI for May delivery decreased 12 cents to $99.62 a barrel on the New York Mercantile Exchange, the lowest settlement since March 25. Volume was 1.9 percent lower than the 100-day average.

Brent Contango

May Brent was 2 cents more expensive than the June contract at today’s close after moving into contango in intraday trading. The loss of backwardation, where oil for immediate delivery is more expensive than future deliveries, often signals that supplies are starting to exceed demand.

“The meeting was positive, the government delegation gave its agreement in principle to three demands of the Barqa region,” Ali Al-Hasy, spokesman of the self-declared Executive Office for Barqa, or Cyrenaica region, said by phone about a meeting held today with a government delegation in Brega, eastern Libya. “The delegation should return in a few days with a confirmation of the agreement by the government.”

The Libyan government hasn’t confirmed that talks were held today with the rebels.

Rebel Demands

The Barqa group called for the withdrawal of a military threat to attack the oil ports under rebel control, an audit of crude sales operations by the government over the past three years and “an agreement on oil export mechanism,” Al-Hasy said. He declined to give details on the suggested oil-export sale mechanism.

The North African country’s oil is categorized as light sweet because of its below-average sulfur content and lower density. Libya’s crude yields more gasoline than other grades.

“There’s some optimism that a few hundred thousand barrels of light, sweet Libyan crude will soon be hitting the market,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York.

WTI slipped after a U.S. supply drop was tied to a waterway shutdown. The Houston Ship Channel reopened on March 26 an oil spill closed it for four days.

Crude inventories dropped 2.38 million barrels in the week ended March 28, according to the Energy Information Administration. Imports tumbled 786,000 barrels a day to 6.83 million last week, the least since January 2000.

U.S. Inventories

“People aren’t concerned about the drop because it was related to the closure of the Houston Ship Channel,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “It’s not like those barrels disappeared. They are waiting on tankers and will be counted in next week’s report.”

Supplies expanded by 32.2 million barrels, or 9.2 percent, to 382.5 million in the 10 weeks ended March 21, EIA data show.

Crude supplies at Cushing, Oklahoma, the delivery point for WTI, decreased 1.22 million barrels to a four-year low of 27.3 million. Stockpiles at the hub have fallen since the southern portion of the Keystone XL pipeline began moving oil in January to the Texas Gulf Coast from Cushing.

“Supplies are still ample,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $115 billion of assets. “Cushing supplies have been declining for a while now but that’s a function of a new pipeline, not a shortage of supply.”

Refineries operated at 87.7 percent of capacity, up 1.7 percentage points from the prior week, according to the EIA. Refiners perform maintenance in March as they transition to summer from winter fuels.

“We’ve been expecting refinery runs to rise as they come out of maintenance,” Walker said. “The gain this week was a bit larger than expected.”

--With assistance from Maher Chmaytelli in Dubai.