The new year kicked off with a bang. A combination of factors provided pivotal support to the oil market. These include freezing temperatures in the northern hemisphere sending distillate prices higher, the halt of piped Russian natural gas to Europe via Ukraine, falling OPEC production in December and U.S. sanctions on Russia’s oil sector, some of its producers, and its shadow fleet, which is used to carry sanctioned oil to willing buyers.

The impact of these factors is discernibly felt in the U.S. as mirrored in the changes in oil inventories, particularly crude oil. Nationwide crude oil stocks registered their eighth successive weekly depletion during the week ending January 10. Perhaps more importantly, inventories meaningfully declined around the USGC and also in Cushing, the CME Group delivery point for its benchmark Crude Oil futures contract. In fact, at this crucial hub, crude oil stocks are around their lowest level for more than 10 years. It will, therefore, not come as a surprise that not only does WTI enjoy outright but also relative price support compared to Brent. The arbitrage has been strengthening of late and has reached its highest daily closing level at the beginning of the month since July last year.

The chart above illustrates that the relationship between Cushing stock and the arbitrage is inverse. What is somewhat unexpected is that despite the comparable strength of WTI, U.S. crude oil exports have remained healthy. During the latest reporting period, it jumped 1 mbpd week on week, notwithstanding the rally in the arbitrage. At 4.1 mbpd, it is 14% higher than the seasonal norm. It implies that the U.S. sanctions on Russia have created an extra thirst for non-sanctioned crude oil, and the U.S. is more than happy to satisfy this demand. Secondly, after the inclusion of WTI Midland in the Brent basket, the increased role of U.S. crude oil in international trading is undeniable. In times of tightness, it keeps proving to be a reliable source of supply. In case of periodic weakness of the arbitrage, it will prove a popular choice of setting the price of Brent. Consequently, the downside will remain limited in the WTI/Brent spread, even when the recent rally in outright prices runs out of steam.