Brent crude falls to lowest in 17 months on ample supply

LONDON (Bloomberg) -- Brent crude dropped to the lowest level in almost 17 months, narrowing its premium over West Texas Intermediate, on concern global supply growth will outpace demand.

The European benchmark settled below $100 for the first time since April 2013. World petroleum supply will increase by 1.6 MMbpd this year while consumption will rise by 1 MMbpd, the Energy Information Administration forecast today. WTI narrowed its discount after Platts said Tallgrass Energy Partners LP may delay the Pony Express pipeline from Wyoming to Cushing, Oklahoma, to November.

“The very fundamental view right now is that demand is falling and supply is still pretty fat,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “There is really nothing to lean on in this market to help support it.”

Brent for October settlement fell $1.04, or 1%, to $99.16 a barrel on the London-based ICE Futures Europe exchange, the lowest close since April 18, 2013. Volume was 14% above the 100-day average. The benchmark, used to price more than half of the world’s oil trade, was at a premium of $6.41 to WTI, the smallest since Aug. 14.

Weaker Demand

WTI for October delivery rose 9 cents to $92.75 a barrel on the New York Mercantile Exchange. The contract slid to $92.66 yesterday, the lowest close since Jan. 14. The volume of all futures traded was 29% above the 100-day average.

Most of the crude supply growth will come from countries outside of the Organization of the Petroleum Exporting Countries, the EIA, the Energy Department’s statistical arm, said in its monthly Short-Term Energy Outlook. Output in the U.S. will increase to 9.53 MMbpd in 2015, the highest since 1970.

“Weaker oil demand and lower refinery runs in European and Asian countries within the Organization for Economic Cooperation and Development this year have reduced market tightness,” the EIA said in the report.

The EIA lowered its price forecast for Brent to $106 for this year from $108.11. WTI will average $98.28 a barrel this year versus an August projection of $100.45. The EIA may say tomorrow that U.S. crude inventories shrank by 1.5 MMbbl last week, according to a Bloomberg News survey before the EIA’s weekly report.

Inventory Report

“WTI is stronger today and the spread is narrowing ahead of the inventory data,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “We can see contraction in the Brent-WTI spread over the short term because of this pipeline being delayed.”

U.S. supply dropped to 359.6 MMbbl in the week ended Aug. 29, the lowest level since January. Stockpiles at Cushing, the delivery point for WTI futures, fell 385,000 to 20.3 MMbbl on Aug. 29, the EIA said.

Pony Express may be delayed after the line failed hydrotests, Platts said on its Twitter account yesterday. “That’s the reason why WTI is popping against Brent,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC.

Tallgrass is converting the line to carry crude to Cushing from the Bakken production areas of North Dakota and eastern Montana, with expected throughput of 230,000 to 320,000 bopd, according to the owner.

The pipeline will be comprised of a converted portion of an existing natural gas pipeline and a newly constructed pipeline. Tallgrass previously planned to begin service in August, according to a website for the project, which no longer lists a start date.

“We are seeing a snapback mainly due to expectations that we are going to see another draw in stockpiles,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The selloff has over-extended itself. The news about the Pony Express line is pushing up front-month WTI.”