From The Wall Street Journal

U.S. oil prices are lagging behind global oil prices climbing toward $80 a barrel, the latest sign of a market that has gone from glutted to exceptionally tight in the past year.

U.S. oil futures are trailing Brent, the global benchmark, by more than $7 a barrel, settling at $71.28 a barrel on Friday. The two oil benchmarks are further apart than they have been since 2015, before U.S. crude could be freely exported.

The divergence is a sign of how stretched global oil supplies have become even as U.S. output has marched higher, overtaking Saudi Arabia and rivaling Russia. That has contributed to soaring U.S. exports, which have hit a record of nearly 2.6 million barrels a day as users clamor.

“The market is screaming right now, ‘We need every barrel we can get,’ ” said Phil Flynn, an analyst at the Price Futures Group.

Both benchmarks have been on a tear lately. The Organization of the Petroleum Exporting Countries and its allies have been holding oil off the market for more than a year, and demand has surged as the global economy roared to life. Unexpected disruptions, like plunging oil output from Venezuela, have tightened supplies even further. A glut of oil that held prices down for years is essentially gone.

Higher oil prices are starting to boost inflation and some worry that they will rein in the pace of economic growth, cutting into disposable income. U.S. gasoline prices have climbed to $2.92 a gallon on average, and are already more than $3 in several states. Companies like Walmart Inc. have warned that higher fuel prices are starting to threaten margins.

The political jockeying over higher oil prices has begun. President Donald Trump has pointed the finger at OPEC, blaming the cartel for “artificially Very High” prices in a tweet in April. Sen. Ed Markey (D., Mass.) has said Mr. Trump’s foreign policy is driving prices higher and is calling to reinstate the oil-export ban, which was lifted in 2015.

“Rather than sending American crude oil abroad to benefit Big Oil’s bottom line and foreign nations such as China, it should be kept here to help insulate consumers from geopolitical uncertainty and benefit American families,” a report to be released by his office on Monday says.

Some economists have argued that shipping oil abroad wouldn’t contribute to higher prices at the pump. Retail fuel prices have historically been more closely tied to the world benchmark rather than the national one, since gasoline is exported.

Lately, Brent has been pulling ahead of West Texas Intermediate, the U.S. benchmark. Tensions in the Middle East and anticipation that renewed sanctions will crimp Iran’s oil exports are having an outsize impact on global prices.

Investors are betting that markets in Europe and Asia would be first to feel the impact from any disruption while the U.S. market will remain well supplied. U.S. crude production has surged to 10.7 million barrels a day, its highest level ever. That is contributing to the local price malaise.

  1. Alexander Blackman, an executive at Standard Delta, a Houston based energy company, said he thinks the spread could soon widen to $10 a barrel for the first time in three years.

“It’s a function of U.S. oversupply and OPEC policy,” he said.

The difference between U.S. and global oil prices is a key factor in determining when it is profitable to load oil onto tankers and ship it abroad. A wider price spread makes longer, more costly journeys to far-flung markets more worthwhile. Analysts expect exports to keep climbing as long as the price difference is flashing a green light.

U.S. oil producers that can get their oil to the Gulf Coast to be loaded onto tankers are reaping the benefits. Pioneer Natural Resources Co. , for example, told investors recently that 95% of its West Texas production flows toward refineries and export facilities at the Gulf, where it fetches prices linked to Brent. That added $16 million to its cash flow in the first quarter.

But others aren’t so lucky: A lot of oil is backing up in West Texas where there aren’t enough pipelines to get all the oil to market.

Some analysts said Brent’s push higher may be a signal that U.S. oil can’t fill the void in the global oil market quickly enough.

The widening price gap is “likely to be a key barometer to gauge the ability of U.S. producers to get their swelling production to a global market that’s looking for Plan B,” analysts at TAC Energy wrote in a recent client note.

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