WTI Versus Brent

Excerpt from the February 15th Powers Energy Investor Issue

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Editor's note: Bill Powers will be appearing on the Financial Sense Newshour's Energy Update this week so be sure to check that out.

One of the biggest pricing anomalies that has developed over the past 6 months, in an otherwise very efficient world crude oil market, is the nearly $14 premium Brent crude trades above West Texas Intermediate (WTI) crude, the NYMEX benchmark.   According to the Financial Times (FT), on February 10th, the spread blew out to a record $16 during intraday trading.  Historically, Brent crude, which has recently traded over $102 per barrel, has traded at a slight discount to WTI but recent developments in North Dakota’s Bakken oil play and Alberta have turned this traditional relationship on its head.  First, Canadian oil sands projects are now producing more crude than U.S. Midwest refineries can handle so excess crude is shipped to Cushing, Oklahoma for storage.   When the increase in Canadian oil sands flows are combined with the 72,000 barrels per day that arrive in Cushing on trains from North Dakota, inventories rise - and to record levels (Source: http://www.ft.com/cms/s/0/379af0ec-3552-11e0-aa6c-00144feabdc0.html#ixzz1DddSReNA).  In late January, inventories at Cushing reached nearly 38 million barrels and remain at historically elevated levels.  Unfortunately, the inventories are likely to remain high at Cushing for at least two more years since TransCanada plans to open a new 150,000 barrels per day pipeline from the Canadian oil sands to Cushing in Q1 of this year (Source: WSJ).  The inventory situation at Cushing will markedly improve in 2013 when TransCanada expects to complete an additional pipeline to carry oil from Cushing to Gulf Coast refineries.  In an effort to avoid the steep discount at Cushing compared to other sales points, some traders have started re-directing trains of crude from North Dakota to Gulf Coast refineries in order to bypass Cushing altogether (Source:  Financial Times).  

The historically wide spread between WTI and Brent is causing a substantial amount of confusion over the actual supply/demand balance for oil.  Unless the spread narrows in the near future, I expect many producers to follow Saudi Arabia’s lead and drop WTI from its pricing benchmark. According to the FT, Saudi Arabia dropped WTI from its benchmark for pricing oil for U.S. customer over 2 years ago.

Given that Brent will be increasingly be seen as the most important benchmark for crude oil pricing, investors should expand their monitoring of changes in Brent pricing since many of the world’s largest producers consider it the only benchmark where true price discovery is occurring.

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