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Investors may get spooked by a sharp rise in US product inventories, refinery crack spread compression and upcoming Seaway pipeline capacity additions this month. However, any pullback will likely be fleeting.
According to our Commodity & Energy Strategy service, the Brent/West Texas Intermediate (WTI) spread will stay wide, despite the Seaway capacity expansion this month. The upcoming planned capacity addition was insufficient from the start to fully resolve the Cushing storage issue.
Furthermore, US oil production keeps surprising to the upside. Cushing inventories have risen above 50 million barrels and petroleum railroad transportation is skyrocketing. This highlights that transportation bottlenecks will persist.
Importantly, refinery stocks are still cheap by historical measures and earnings will continue to expand. Massive dislocation of the WTI sour grade relative to its sweet counterpart will give refinery profits a further boost.
Also, the jump in refined product inventories, which has been a source of investor concerns over the past month, is mostly seasonal and should not lead to much further crack spread compression against WTI.
This post was originally published by the BCA Research blog.