LLS discount to Brent could be permanent on light sweet crude invasion

The Louisiana Light Sweet prompt crude price has disconnected from its traditional price spread relationships as a light sweet crude wave invades the US Gulf Coast.

Traditionally, the price of coastal-based benchmark LLS was connected more to the price of imported crudes, and therefore, the price of Brent. And up until lately, LLS traded mostly at a premium.

But this relationship has changed dramatically.

The Brent/LLS spread reached $12.51/b Friday, the widest level since the beginning of the year. At the start of 2013, it stood at 75 cents/b, Platts data shows.

The Brent/WTI spread

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However, the positive Brent/LLS spread inverted many times this year, and during several extended periods LLS regained a premium to Brent. For instance, In March, the Brent/LLS spread was as wide as minus $6.78/b. And,  the LLS price was at a slight premium to Brent during most of the summer.

But Brent has traded above LLS every day since mid-August, a sign that LLS’ discount could be permanent.

The price of LLS has been pulled lower, in part, by a flood of crude from the Eagle Ford Shale in South Texas and the Permian Basin in West Texas.

Last week, the Energy Information Administration said in a report that Eagle Ford production is expected to rise just in the next month by 33,000 b/d to 1.28 million b/d. That production has grown substantially, and is now surpassing growth in the Bakken. Meanwhile, oil output there in the North Dakota sesson is expected to to increase by 26,000 b/d to 1 million b/d next month. At the same time, Permian Basin production is expected to remain flat next month at about 1.34 million b/d. Most of this production is expected to compete with or be blended into LLS.

A slew of analysts, who long-ago predicted that the LLS price would slip to well below the North Sea benchmark crude, are likely breathing a sigh of relief as they utter “I told you so.”

But it may have been harder to predict the rumored logistical side-effects of relatively weak LLS prices. Market participants said late last week that shippers are considering sending the relatively cheap crude on vessels from St. James, Louisiana, to the Canadian and US East coasts.

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LLS is priced at St. James, where traditional takeaway capacity seems to be shrinking. The crude could traditionally flow westward on Shell’s Houma-to-Houston Pipeline, but that line is in the process of being reversed to become the Houston-to-Houma Pipeline.

A trader also said that recently that more LLS is moving up the famously underutilized Capline Pipeline–a 1.2 million b/d crude line that originates in St. James and terminates in Patoka, Illinois.

Capline has been running at low utilization rates since crude stocks began building in recent years at the Cushing, Oklahoma, storage hub, and has been widely referred to as a candidate for reversal.   US refiner Valero rails Bakken crude into St. James and ships about 100,000 b/d on Capline to its Memphis refinery. But it’s hard to tell how many other companies still ship on the line.

Cowen Securities senior analyst Sam Margolin said that sending LLS crude up Capline is a possibility in light of market conditions, but Turner, Mason Vice President John Auers disagreed, saying that there are more than enough light crude barrels already available in the Midcontinent, notably Bakken and West Texas Intermediate.

But LLS is also becoming increasingly competitive with WTI. The LLS differential to WTI has steadily narrowed since March 20, when it was assessed by Platts at WTI plus $22.25/b. On Friday, it was assessed at WTI plus $2.10/b.

LLS seems to also be edging out Bakken crude along the Gulf Coast, where crude-by-rail unloadings have fallen. Since the first crude-by-rail terminals came into service about four years ago, Bakken has been rolling southward to the Gulf Coast.

According to loading data provided by volume-monitoring firm Genscape, total unloadings in St. James averaged around 121,000 b/d last week and 132,000 b/d for the week before that, down from 177,000 b/d three weeks ago and 195,000-232,000 b/d in mid-August. Genscape’s data takes into account two large rail unloading terminals owned by each Plains All American and NuStar.

At the same time, Bakken rail loadings appear to be climbing, according to Genscape. Those barrels are likely heading to the US East and West coasts, sources said.

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