Time spreads discount SPR release risk

Crude prices weakened, to reach 79.4 $/b for ICE Brent January contracts, as Biden tried to convince other countries to release crude from their domestic SPR. Front-month time spreads remained relatively supported, close to 100 cents, which means that the market is not materially concerned by these. Indeed, Japan already declined the US demands, while China, who responded positively to the Biden administration, was already releasing strategic stocks prior to this week, as they operate on a more discretionary basis. On the contrary, WTI front-month time spreads experienced a steep correction, from 110 to 63 cents, as Cushing built by 0.2 mb and PADD3 drew by 4.9 mb, with geographical spreads and end-of-year tax incentives likely to push stocks from PADD3 to the Cushing area. Close to expiry, it is unlikely that the spread will rally materially.

Longer-term WTI time spreads remained quite strong, at 3.7 $/b for the Z2/Z3 spread, as the US market continues to be plagued by low US crude production and refining runs are likely to ramp up significantly in the month to come as the US refining margins, not affected by natural gas prices, remains the best globally.