In a report released last week, one of Citi's first since industry legend Ed Morse took over as its global head of commodities research group, Citi projects that sometime in the next year, the Brent-WTI spread could blow out to $40 or more. From the perspective of the US and Canada, there's good news in that, because it would happen due to the "continued explosion of production of crude oil in these regions," specifically western Canada and the US Midcontinent. (On Friday, the spread between the August NYMEX light sweet contract and the ICE Brent contract was $22.13.)
And while market players are doing everything to move crude away from those producing areas, short of airlifting it out, it just isn't enough. The result, according to Citi: "At some point between now and summer 2012, market dynamics are being set up for perhaps a doubling of the recent spread to $40/bbl or even wider, combined with a shutting in of production both in Western Canada and the US midcontinent due to the continued explosion of production of crude oil in these regions and the inadequacy of physical evacuation to other markets whether by pipeline, truck, rail or barge."
So that's not good for the WTI benchmark. But Citi isn't real keen on the Brent benchmark either. The difference is that Citi's report sees the WTI market eventually righting itself, but doesn't necessarily see that for Brent. Brent's problems are the declining production in the North Sea, and in the short term, the fact that Libya's disruption has tightened the market for sweet crudes, putting more pressure on the sweet streams from the North Sea. (But it isn't clear how that's a problem; the Brent prce would be considered to be accurately reflecting that tightness.)
