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The spread between crude contracts in Europe compared to those in the U.S. reached a peak of more than $27 in October. But Aaron Fennell, Commodity Futures Specialist at ScotiaMcLeod, tells BNN that the days of such a large spread are coming to an end.
"The WTI [West Texas Intermediate] story is reaching its natural conclusion in that the width of the spread back in the summer was largely driven by speculative capital," he tells BNN. "We have the reversal of the [Seaway] pipeline in the U.S., we have Libyan oil production coming on stream, and we have the European situation getting worse, so that means European demand dropping off."
Fennell says the premium being paid for Brent crude is a historical anomaly.
"WTI is a slightly higher grade of crude oil than Brent Crude…so typically it's a little higher than the Brent crude price," he says. "I think we're going to eventually get back to that reality."
While TransCanada continues to fight the political battle over its controversial pipeline to ship crude from Alberta to refineries in Texas and the Gulf Coast, Enbridge, has moved ahead with its own plan to send oil sands crude south. Many analysts believe that by reversing the Oklahoma-to-Texas Seaway pipeline, Enbridge will eliminate the spread between Brent and WTI.
“The differential is expected to remain between $10-15 per barrel until the bottleneck at Cushing can be alleviated and land-locked production can be fully connected with Gulf refineries and the seaborne market,” Randy Ollenberger, an analyst at BMO Capital Markets, said in a recent note to clients. “The reversal of the Seaway pipeline announced by Enbridge and its partner Enterprise should narrow or even eliminate the spread by 2013.”