In the wake of the US Energy Information Administration's announcement Wednesday of a week-on-week build in Gulf Coast crude stocks of 8.751 million barrels to 264.340 million barrels, the Light Houston Sweet differential fell Thursday to an assessment of WTI cash plus $2.10/b, down 90 cents week on week.
LHS, which represents WTI Midland crude at Houston terminals, has been drawing strength recently from its ability to be exported more economically than other comparable grades from Houston, according to market sources. With refineries abroad mainly running on light sweet crude versus heavy sour crude, as opposed to US refineries mainly running on sour crude versus light crude, the opportunity exists for the US to supply refineries abroad with LHS and other domestic light sweet crudes, according to one source familiar with the Gulf Coast market.
Increased demand from Europe has boosted regional light sweet crudes, as grades like LHS displace Nigerian grades like Qua Iboe, Bonny Light and Escravos, which are of a lower quality and costlier to deliver FOB to Europe via Rotterdam.
Despite the boost from exportability, additional downward pressure on LHS has come from a falling US Gulf Coast cracking netback margin, which decreased $2.95 week on week to $1.27/b as of Wednesday.
A narrowing of the March swap spread between WTI and Brent by $1.01 week over week to 90 cents/b Thursday has further pushed down the LHS differential. The NYMEX and Brent contracts were assessed higher week on week, pushed up on news Monday of China cutting the reserve ratio for Chinese banks by 0.5 percentage point and also by a volatile trading session Tuesday.
LHS began the week by falling 95 cents to WTI cash plus $2.05/b Friday, before rising 30 cents Monday, 5 cents Tuesday and 5 cents Wednesday. On Thursday, LHS dropped 35 cents to its current assessment of plus $2.10/b.
The weakening of LHS coincided with a drop in the Light Louisiana Sweet differential, which fell 80 cents week on week to $2.25/b. After playing catchup to the LLS differential for several weeks, LHS was assessed at parity to LLS on Monday at WTI cash plus $2.35/b before dropping back into a discount of 15 cents/b Thursday.
Meanwhile, the WTI Midland differential strengthened week over week by 65 cents to an assessment of WTI cash plus 50 cents/b Thursday. The WTI FOB Houston spread to LHS was unchanged week over week at plus 65 cents/b Thursday, with WTI FOB Houston's premium to the April CMA falling 20 cents week on week to $2.75/b Thursday.
