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 Yet some traders say the surprising strength emerging from opaque
physical crude markets in the heartland of the fracking boom also
points to a more important, lasting factor: declining production of
Bakken crude, a long-anticipated but as yet unproven twist in the
shale revolution.
The buying frenzy pushed Bakken delivered at Clearbrook, Minnesota
<WTC-BAK>, to trade just 35 cents a barrel below the West Texas
Intermediate benchmark last week, dealers say, the narrowest
discount since July 2013. On Tuesday, it widened slightly to a
75-cent discount. Four months ago, it traded at a $7.50 discount.
"The rapid spread contraction may be indicative of a
faster-than-anticipated production decline, presenting upside risk
to our price forecast" in the second half, Barclays analysts wrote
in a report.
There are other compelling reasons for Bakken crude's relative
strength, to be sure.
Canada's oil exports to the United States suffered their biggest
monthly decline on record this spring due to maintenance on big oil
sands projects as well as forest fires that slashed a tenth of
Alberta's total oil production.
Refiners in the U.S. Midwest region ran the most crude ever for the
month of May thanks to a light maintenance slate and robust margins,
triggering a bidding war for light barrels.
Regardless, the disappearing discount offers a partial reprieve for
large producers like Continental Resources <CLR.N> and Hess Corp <HES.N>
after the past year slashed global oil prices by as much as 60
percent to six-year lows.
Thanks to the stronger differentials, Bakken crude <BAK-> has risen
54 percent from its mid-March low, whereas U.S. WTI prices <CLc1>
are up only 37 percent, according to Reuters data.
DATA LAG
Oil drilling rigs are down 58 percent this year in North Dakota,
setting the stage for a reversal after years of breakneck production
growth. The timing and scale of that descent have been unclear due
to lagging official data.
North Dakota's Department of Mineral Resources will release figures
for April production on Friday. The No. 2 oil-producing state posted
a surprising jump in oil output in March.
The Energy Information Administration estimates that Bakken output
was little changed from a record high 1.3 million bpd in March, but
expects it to fall by 70,000 bpd over the following three months
Others still see growth through May. PointLogic, which uses
real-time natural gas flow data to forecast oil production,
estimates output rose by 31,000 bpd in April versus March and kept
rising through May before turning lower recently, according to data
made available to Reuters.
Last week, North Dakota's crude-by-rail loadings averaged 437,000
bpd at monitored terminals, the lowest level since mid-March,
industry provider Genscape said. Meanwhile, Enbridge's North Dakota
pipeline system has run close to capacity, signifying that
production has fallen.
[to top of second column] |
HUNGRY REFINERIES
The rise in differentials differs from the brief rally in mid-2013,
when the North Dakota crude traded at a premium. At that point,
competing new infrastructure bid up prices.
This time it is largely about supply from Canada. U.S.-bound exports
averaged under 2.8 million bpd in May, EIA data shows, down 360,000
bpd from April - the biggest such monthly decline ever.
Syncrude Canada's oil sands output has fallen by more than 50
percent between January and May on a planned turnaround.
And recent Alberta wildfires hit production from companies including
MEG Energy and Cenovus Energy Inc Benchmark WCS differentials
climbed to a five-year high, trading at a $7.00 discount last week.
Cold Lake crude, most directly affected, is much heavier than Bakken
light, but traders say that refiners have adjusted their slates to
step up Bakken buying.
"Why pay -$8 (vs WTI) for Cold Lake when you can pay -$0.50 for
Bakken?" said one trader. "That puts a bid behind Bakken."
Meanwhile, Midwest refiners are running at full speed ahead of
summer gasoline demand. PADD 2 throughput rose to 2.7 million bpd
last month, the highest ever for May and up 3 percent from a year
earlier, EIA data shows.
LOOKING ABROAD
It is unclear how long the strength may last. Canadian production is
already recovering and Midwest refinery runs <REFCR-2-EIA> have
fallen for the past three weeks.
In addition, traders say elevated Bakken prices have priced out East
Coast refiners that have been buying about a third of output, EIA
data shows.
Just last week, the Bakken and West Africa Qua-Iboe <BFO-QUA>
differential tightened to the smallest since June 2013. With the
arbitrage opening for imported crude, Bakken barrels may soon be
seeking new homes.
"The question is just how fast are people reacting?" said Sandy
Fielden at RBN Energy. "How quickly are people jumping off rail and
into pipeline? For the short term, there's more demand from Midwest
refiners. But will it stay?"
(Editing by Jessica Resnick-Ault, Jonathan Leff and Matthew Lewis)
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