Long live the spread

Record US oil stocks show need for policy shift

America's record crude oil stocks show the need for a policy shift. There is more on hand than at any time in the last 30 plus years. Amidst the glut, drillers are getting less for their oil than global market rivals. The gap will tend to widen unless lawmakers in Washington rethink a long-running ban on exports.

The United States now has close to 400 million barrels of oil in reserve, not counting the 700 million barrels hoarded by the government for emergencies. That is equivalent to around 21 days of consumption, the most flush supply since the mid-1980s. In simple barrels, it's more than the country has held in reserve since 1931 as the Great Depression took hold.

On Monday the price of America's West Texas Intermediate crude was $8 below the international Brent benchmark - a gap that has doubled over the past two weeks. Back in October 2011, WTI fetched $27 a barrel less than Brent. But that record spread reflected bottlenecks in the infrastructure carrying crude to Gulf Coast refineries.

Those limitations have largely been remedied. Now the difference between WTI and Brent prices reflects excess domestic supply. Louisiana Light Sweet, the US benchmark for oil produced in the Gulf of Mexico, faces no transport issues and also traded at a discount to Brent of around $6 on Monday. Just two weeks earlier, the gap was only $2.

Spread over a year, the current shortfall in prices would cost U.S. oil producers about $20 billion in revenue compared to sales at the global Brent price. Citigroup analysts expect another 11 percent surge in US oil production this year. That would overwhelm the capacity of US refiners to process domestic crude, energy bankers at Tudor Pickering believe. That in turn could mean even lower prices for home-produced oil that has nowhere to go.

America's ban on all but the tiniest exports was imposed in the 1970s after the Arab oil embargo. Times, and the US energy balance, have changed. Low domestic prices may boost industries in the United States that use oil or its derivatives. But there's plenty of demand for America's light crude from refineries elsewhere in the world - and US drillers are lobbying for access to those markets. Rising crude stocks reinforce their case.