By Andrew Nelson

Back in 2010, the traditional price gap of West Texas Intermediate crude over Brent Crude closed from around US$2 as Canadian oil started to arrive at the WTI Cushing storage facility. At the same time, analysts were predicting that North Sea oil reserves were beginning to run down. The price of Brent then began to rise steadily over WTI, and the price gap was only exacerbated when shale oil production in the US really hit its straps. In the interim, the Brent-over-WTI price gap has tended to fluctuate between around US$12 and US$26, reflecting the high cost of limited storage at Cushing.

In recent months, that gap has been narrowing, and has now fallen below the US$5 mark. This is due to an uneven global economic recovery driven by a slow but steady improvement in the US outlook and the lack of slow but steady improvement in China and Europe.

ANZ Bank predicts that demand for US crude will continue to rise as the US economy continues to recover. This is especially so after the latest batch of US economic data again surprised to the upside for the most part. As a result, the analysts believe the spread may even reverse in the short-term. They have set a target of West Texas US$0.50 above Brent.

While oil markets started to diverge from what were buoyant equity markets in April, ANZ thinks the more traditional positive correlation will re-establish itself. The bank notes the 3-month rolling correlation between WTI and the S&P500 has already lifted to positive 0.65 over the past few days.