Revise enough times; you might just
get it right!
Jeff Currie originally said that by January of 2013 the
WTI-Brent spread would narrow to $4 because of the Seaway pipeline; Jeff amended
this target after Cushing inventory continues to build even though the Seaway
route was in operation (June 2012 100,000 barrels per day) to $8 by January of
2013 once the pipeline was expanded (January 2013 400,000 barrels per day). Now
Jeff Currie states that the spread will shrink to $6 in the second quarter of
2013 (No more pipeline expansions during 2nd quarter).
I hope Goldman Sachs doesn`t trade on his recommendations.
Jeff Currie has to be one of the worst oil analysts in the industry, and the
oil industry is full of bad analysts. How he has continued to be employed in
this capacity despite being incorrect on almost every major call of the last
decade regarding the oil markets is astonishing.
I guess Jeff Currie is another case where job performance for
analysts on Wall Street is less critical than keeping good relationships with
upper management. Jeff Currie must have pictures on somebody high up in Goldman
Sachs because he couldn`t analyze the oil markets if his life depended upon it.
Further Reading - Counterpoint to Goldman Sachs Chief Commodity Strategist
WTI-Brent Spread $20
Well it is January of 2013 and Jeff the WTI-Brent spread is
trading around $20, the same range it was for 2012, and Cushing Oklahoma has
nearly 52 million barrels in storage, with no signs of decreasing anytime soon
in a significant manner.
The Spread existed when Cushing only
had 30 Million in Storage
For context a year ago Cushing storage stood at 30 million
barrels, and there was a significant spread back then between the two oil
benchmarks. So even if magically robust demand for products picked up all over
the world, do you envision Cushing storage being reduced down below 30 million
barrels?
Maybe if inflows were flat or declining! But if the
trajectory of domestic production continues for 2013 which seems as certain as
Jeff Currie being wrong again in the second quarter then inflows into Cushing
will be trending higher.
Refiners on the other side of trade
The refiners have been on the other side of this trade,
actually putting money down on the trade by committing resources to expanding
their operations to take further advantage of this spread continuing. There is
a reason that Hess closed the refinery on the East Coast, they cannot make the
same margins that the Gulf Coast refineries can because of cheap access to WTI
oil.
Jeff Currie has woefully underestimated the magnitude of the
rise in domestic and North American production of oil. Cushing is going to need
to expand storage facilities well beyond 100 million barrels to keep up with
the domestic drilling activity in North America. There are so many projects
that haven`t even begun producing but will come online over the next 5 to 10
years.
$6 Average Spread for 2nd
Quarter seems implausible
Therefore, even if we take the best case scenario for a 30
million drawdown at Cushing, and given the continuing troubles in the Middle
East, and throw on top of that the dynamics of benchmarking products to the
global Brent Oil contract.
It seems highly unlikely that the WTI – Brent Spread
averages $6 for the second quarter. The best chance for a contracting spread of
this magnitude would be a severe “Risk Off” event as the spread has narrowed
the most during the past two years on ‘asset withdrawals’ from markets.
Further Reading - Seaway Pipeline No Panacea for Cushing's Oil Glut
International Peg: Holy Gail for
Refining Margins
This is important because traders, hedgers and refiners set
up their models from the products based upon certain given levels of price for
the base oil commodity. The incentive - given that products are exportable - is
to peg products to the highest international input price for oil.
You can call it Brent or whatever you like but refiners have
learned after years of getting killed on margins that the domestic peg will
never work. The international peg has unlocked the Holy Grail for refining
margins!
The Brent Premium & Crack Spreads
Products going forward will always be priced to some much
higher priced benchmark. You didn`t honestly believe all that crap about
shortages in Brent, tight markets, etc.? Brent exists, and the premium that
Brent represents over WTI for a reason, it helps ensure the pricing model for
the Crack Spreads.
This is why sometimes Brent moves the product prices, and
equally the product prices move Brent, it is to ensure the profit models of the
crack spreads by the refining industry. So bottom line Jeff Currie, the
refiners are going to make their money, and they cannot make their money with a
$6 second quarter spread between WTI and Brent.
So it seems on even a conservative basis that the WTI-Brent
spread should average over $12 for the second quarter which starts in 7 weeks.
Multi-Variable Analysis vs. Caveman
Analysis
I think Jeff Currie has just done what I call a one variable
analysis: 1) Cushing large supply, 2) Open Seaway pipeline, 3) Ergo, WTI-Brent
Spread goes away. The WTI-Brent Spread is much more complex that this and
requires at the very least a multi-variable analysis. Some of the important
factors for a multi-variable analysis include: 1) North American Production, 2)
The Middle East, 3) Crack & Product Spreads, 4) Refining Margins, 5) Export
Market for Products, 6) International Peg, 7) ICE Exchange & Brent contract
Transparency issues 8) Lack of Global Inventory Data, 9) Greed, Market Manipulation
& the Profit Factor, 10) Historical Prices & Shifting Oil Market
Dynamics
The best & brightest work at
Goldman Sachs
Unfortunately, Goldman Sachs doesn`t seem to reward
competence in their analysts as Jeff Currie has never been one to utilize
multi-variable models in any analysis over the last decade at Goldman Sachs. I
used to think that Jeff Currie was just a “mouth piece” for Goldman Sachs
Trading Book, but I have come to the conclusion that he really is just a bad
oil analyst!
