Wildfire threat pushes key US crude spread to nine-month high

A key US crude spread that gauges short-term market tightness surged to the highest in almost nine months as wildfires risk disrupting supplies from Canada, with a frenzy in the options market accelerating the gain. 

The premium for US benchmark West Texas Intermediate’s front-month futures over the next contract — known as the prompt spread — soared as high as $1.60 a barrel, the highest since October. 

The increase signals crude traders are bracing for the possibility of a price spike as wildfires in Canada — the largest provider of US crude imports — threaten more than 400,000 barrels of daily production. The expanded Trans Mountain pipeline is also pulling more Canadian barrels away from the key storage hub in Cushing, Oklahoma, the pricing point for US futures. Inventories there are already at the lowest since April. 

Volatility in WTI’s prompt spread was also fueled by a surge of trades in options on the measure, traders said. Those contracts expire Friday, and the equivalent of more than 30 million barrels of contracts have come into the money since the spread first surged last week. Calendar spread options also saw their busiest day of trading in several weeks on Friday, when the rally began. 

The prompt spread’s surge comes as headline prices largely tread water. While analysts have been expecting the market to tighten in the coming weeks, US crude futures have been stuck between $80 and $85 this month.

The out-of-control blazes are spreading quickly due to dry and hot conditions, threatening projects operated by Suncor Energy Inc., MEG Energy Corp. and Canadian Natural Resources Ltd. MEG is already evacuating non-essential personnel as a blaze approaches its Christina Lake site. Traders watch Canadian flows to the US because the Nymex benchmark future contract consists of domestic blends of oil that often contain some Canadian crude that’s moved in the same pipelines. 

The bullish pattern in spreads has been building up for about a week, when refineries cranked up oil processing in anticipation of hurricane Beryl, drawing down supplies at Cushing. After the storm passed, refineries continued to tap Cushing for oil as Texas ports that import crude took days to reopen.