Analysis: Some ask "what oil glut" as Midwest stocks dip

The latest U.S. oil inventory data contradicts a widely held notion among oil traders that a huge glut of Canadian and U.S. shale crude oil is accumulating in the middle of the United States and causing the record gap in global oil benchmark prices.

Instead, U.S. commercial crude oil inventories in the Midwest and Cushing, Oklahoma, fell last week to their lowest this year. Midwest, or PADD 2, stocks are now lower than they were a year ago, the first time in over 12 months that they have fallen below year-earlier levels.

Since 2009, falling U.S. Midwest inventories have usually resulted in a narrowing of the Brent-WTI spread.

But this time the spread between Europe's benchmark crude and U.S. benchmark West Texas Intermediate -- which stood near parity a year ago -- has held at a near record of $21 a barrel in favor of Brent.

A Reuters poll released on Thursday shows that the majority of 29 analysts and oil traders surveyed expects that spread to widen further, and surpass $30 at some point in the next year.

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But a vocal minority still views Brent's spectacular premium to WTI as dubious, especially since PADD 2 stocks are declining and the two crudes have similar specifications. Historically, WTI has traded higher than Brent.

"The argument that a surplus in Midwest and Cushing crude is what's pressuring WTI down is coming apart," said Peter Beutel of U.S. energy trading consultancy Cameron Hanover.

"The huge spread tells me that some big banks or a few of the biggest oil traders/refiners are speculating on spreads and have been able to push Brent unjustifiably high."

Brent's gap has been growing since January, and the most commonly cited factor is a surplus of crude in the Midwest, which is receiving more supply from booming oilfields in North Dakota and Canada, but hasn't built pipelines to pump the incoming crude further south.

(Graphic: r.reuters.com/cum92s )

After a recent flurry of bearish global economic data, Brent oil fell more than $3 to around $110 a barrel on Thursday, and WTI fell more than $3, to below $89. That left the gap between the crudes at $21.42 a barrel. The spread spiked to a record over $23 last month.

"WTI/Brent is so out of whack it's unbelievable," said Dominick Chirichella of New York's Energy Management Institute. "It's surprising we haven't seen a downward discounting to maybe the $10 to $12 a barrel range."

The CEO of IntercontinentalExchange Inc (ICE.N) -- the leading exchange for Brent trading -- told reporters on Wednesday that WTI contracts, traded on rival exchange CME, no longer reflected global oil prices, slamming WTI's benchmark status.

But others say Brent prices are being distorted by speculators.