WTI MEH trades at discount to front-month NYMEX light sweet crude contract

Houston — West Texas Intermediate crude at the Magellan East Houston terminal traded Tuesday at a discount to NYMEX front-month light sweet crude for the first time in more than four years, as a market in contango continues to push barrels into storage and weakening refining margins suggest refinery run cuts.

WTI MEH was heard to trade as weak as a $1/b discount to the front-month NYMEX light sweet crude contract, or cash WTI, Tuesday morning, down from Monday's assessment of WTI plus 55 cents/b. The grade was last heard to trade Tuesday morning at a 60 cents/b discount.

S&P Global Platts last assessed front-month WTI MEH at a discount to cash WTI on November 20, 2015, when the grade was assessed at a 40 cents/b discount.

Values for the grade have fallen significantly from March 2, when WTI MEH was assessed at a $3.05/b premium to cash WTI, as a sharply narrowed Brent/WTI spread has applied downward pressure on differentials. Since March 2, the Brent/WTI swaps spread has narrowed by over $2/b, from $4.76/b, to just $2.58/b on Monday.

As the spread narrows, WTI-based crudes are generally seen as less competitive versus those crudes based on Brent.

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While values for WTI MEH fell, so too did values for WTI crude in Midland, Texas. Front-month WTI Midland crude was heard to trade as weak as $4/b discount to cash WTI Tuesday morning before recovering by midmorning. WTI Midland was last heard to trade Tuesday at a $2.80/b discount to cash WTI. The grade was assessed Monday at a $2.10/b, down $3.65/b from the assessed value on March 2.

One trading source indicated that differentials are "getting hammered as refineries are cutting or going to cut." Indeed, while an S&P Global Platts survey of analysts Monday showed that while US refinery utilization is expected to have increased by 0.8% last week to 87.2% of total capacity, the utilization rate would still be more than 2% under the five-year-average. In just mid-February, utilization rates were 2.7% above historic levels. Furthermore, rates could be cut further in the weeks ahead as weak margins due to the collapse of gasoline cracks last week impact refinery profitability.

As flagging prompt demand for barrels has sent the crude oil market structure into contango, where prompt barrels trade at a discount to those barrels for forward-month delivery, the demand to send barrels to storage increases.

Also on Tuesday morning, auction platform operator Matrix Markets sold nearly 12 million physical storage contracts, representing some 11.850 million barrels of storage for months between May and the second quarter of 2021 in Cushing, Oklahoma. It was the largest volume that Matrix has offered and sold during one of its online auctions. The contracts were sold at 31 cents, Matrix reported.

NYMEX WTI futures contracts were selling Tuesday at around a $3.50/b contango between front month April and September. As the future values are at a premium to front-month prices traders and producers have been scrambling to store up crude in order to capture value down the curve.

Additionally, US crude export values have shifted lower as global demand has waned and freight rates have spiked. That too could be adding to an overhang of oil and the need for storage.

"People are swimming in oil right now," one broker said.