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WTI-Brent Oil Spread Shrinks on Morgan Stanley Cushing Forecast

May 6 (Bloomberg) -- West Texas Intermediate crude’s discount to Brent narrowed the most in a week after Morgan Stanley said stockpiles at Cushing, Oklahoma, are weeks away from reaching minimum levels.

The U.S. grade settled above $99, and Brent slid 0.6 percent. Supplies at Cushing, the delivery point for New York- traded futures, may reach a floor of around 20 million barrels in two to three weeks, Adam Longson, a Morgan Stanley analyst in New York, said in an e-mailed note yesterday. Brent dropped as two oil fields in western Libya are scheduled to resume production this week.

“Historically, the minimum operating inventory level has been in the neighborhood of 20 million barrels, and we are approaching the minimum,” James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas, said by phone. “It’s supportive for front-month WTI. It would have a tendency to narrow the price differential with Brent. If Libya can produce more, it’s very bearish for Brent.”

WTI for June delivery increased 2 cents to settle at $99.50 a barrel on the New York Mercantile Exchange after touching $100.42 earlier. The volume of all futures traded was 9.9 percent above the 100-day average for the time of day at 4:10 p.m.

Brent for June settlement fell 66 cents, or 0.6 percent, to end the session at $107.06 a barrel on the London-based ICE Futures Europe exchange. Volume was 10 percent more than the 100-day average. The European benchmark grade was at a premium of $7.56 to WTI, the narrowest since April 28. It was $8.24 yesterday.

Cushing Decline

Stockpiles at Cushing fell to 25.4 million barrels in the week ended April 25, according to Energy Information Administration data. They have tumbled 16.4 million barrels, or 39 percent, since Jan. 24.

“Morgan Stanley came out with a pretty bullish forecast about destocking of Cushing, and that is supporting WTI,” Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania, said by phone.

The decrease at Cushing has come as refineries are resuming operations after routine maintenance and pipelines are pumping oil away from the area, Longson said in the note. His supply estimate is based on a forecast reduction of 1.5 million barrels a week.

“There is a growing expectation that we are going to see supplies at Cushing fall again, and that’s giving the market support,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone.

Storage Tanks

Oil storage tanks typically have floating roofs that rest on top of the crude so there is no space for explosive vapors to waft off the volatile liquid. If the level of crude gets too low, legs attached to the bottom of the roof will hit the ground, allowing the vapors to form.

Blending of different types of crudes means that the minimum level could be higher, closer to 25 million barrels, according to Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a consulting company in London.

BlueKnight Energy Partners LP, which owns storage tanks at Cushing, has estimated the minimum operational supply level as 10 percent to 20 percent of the tanks’ capacity.

Cushing stockpiles have dropped since January as the southern leg of the Keystone XL pipeline began moving oil to Gulf Coast refineries from the hub. Inventories at the hub probably fell for the 13th time in 14 weeks last week, three analysts surveyed by Bloomberg said before a government report tomorrow. The EIA report is scheduled for release at 10:30 a.m. tomorrow in Washington.

Total crude supplies probably rose to more than 400 million last week, according to a Bloomberg survey of 10 analysts before the EIA report. That would be the highest level since the agency began reporting weekly data in 1982.

Libya Production

The Elephant and Sharara oilfields in western Libya will resume output, state-run National Oil Corp. spokesman Mohamed Elharari said by phone in Tripoli. The Keros Warrior tanker started loading oil at the Zueitina port today, the second shipment since Libya lifted force majeure at the terminal.

Implied volatility for at-the-money WTI options expiring in June was 17.5 percent, down from 17.8 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 500,340 contracts at 4:10 p.m. It totaled 362,666 contracts yesterday, 32 percent below the three-month average. Open interest was 1.65 million contracts.

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