Analysis - U.S. crude to regain Brent premium, briefly, on storage bid

By Catherine Ngai

NEW YORK (Reuters) - For only the third time since 2010, U.S. benchmark West Texas Intermediate crude traded at a premium to global marker Brent on Monday, restoring for a few brief moments what was once the normal hierarchy of the world oil market.

While the premium lasted less than five minutes before U.S. futures closed at a 70-cent discount, a growing number of oil traders say WTI could ride high for days if not weeks in the near future, the latest surprising twist in a closely watched spread that has flummoxed the market for the past five years.

The reason they cite for the inversion in the so-called Brent/WTI spread : the lucrative but temporary appeal of buying U.S. crude for storage in Oklahoma oil tanks.

As OPEC chooses to maintain output, an expanding surplus of crude has hammered global markets, driving both WTI and Brent down by some 60 percent since June and putting near-term oil prices at a $9-a-barrel or more discount versus those in a year's time - a structure known as "contango" that makes it advantageous to buy crude now and store it for later sales.

But for traders in the main European markets, that means chartering supertankers to use as floating storage at a cost of $1 a barrel or more per month, traders say. A dozen or so have already been fixed, Reuters has reported.

Domestic competitors are taking a hit as a result. Mainstay Gulf Coast grade Light Louisiana Sweet delivered into St. James, Louisiana, has fallen to a premium of only 80 cents a barrel over WTI, one of the lowest levels since 2008.

U.S. VACANCY AVAILABLE

Across the United States, onshore tanks are barely a third full, data show. And in Cushing itself, the most appealing place for a storage trade, only about 32 million of the more than 80 million barrels of storage capacity is full.

"We have the only empty storage space in the world. And so, all the oil is being pushed here," said one physical trading source.

Yet few expect the structural issues to have disappeared entirely, with U.S. oil production still rising and export constraints in place. Any period of parity may be short-lived.

Goldman Sachs this week slashed its short-term Brent/WTI forecasts from $10 a barrel to just $1 a barrel in the first-quarter, estimating onshore oil tanks and offshore floating tankers could absorb some 1 million barrels per day of surplus crude for nearly a year. But it said the spread would widen back to $6.50 by the fourth quarter as storage capacity runs out.

By the spring, Cushing oil inventories are likely to approach 80 percent of capacity, according to PIRA Energy.

"From a fundamental perspective, the current level of the Brent/WTI spread is unsustainable," analysts at JBC Energy said.