What does the growing spread between WTI Crude and Brent Crude reflect?

on Nov 19, 2012 in Commodity, Home | 2,509 comments

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A price widening has been observed between West Texas Intermediate (WTI), and its global counterpart, Brent Crude, which has gradually become the international marker. Approximately two thirds of traded oils are currently priced relative to it.

Historically the price differential between the two was generally around USD 1 or USD 2 a barrel in favor of WTI. However, sometime in 2007, the premium shifted gradually in favor of Brent over WTI and in early 2009, WTI traded at USD 10 a barrel discount to Brent and Saudi Arabia shifted to Brent in pricing its crude to the US. The differential between WTI and Brent worsened since then and reached almost USD 28 a barrel.

Moreover, much of the crude oil produced in the US eventually finds its way to Cushing, Oklahoma storage facility. Cushing is the delivery location, and the NYMEX pricing point, for West Texas Intermediate (WTI) crude oil. Over the last year, increasing supplies from Canada and the Bakken have continued to find their way through Cushing and due to limited capacity to get oil out of its storage complex, WTI prices have remained under pressure.

Thirdly, WTI typically reflects supply and demand conditions in the US and Canadian oil markets. Brent crude oil, on the other hand, tends to reflect global supply and demand dynamics. Whereas developed-world oil demand declined from 2000 to 2010, oil consumption in countries outside the Organization for Economic Cooperation and Development (OECD) has soared by 12.5 million barrels per day. Chinese oil demand has roughly doubled in 10 years. Today, China consumes more than 10% of global oil demand. Meanwhile, India uses more oil each day than Germany and the Netherlands combined. Within the next 7 to 10 years, India will overtake Japan to become the world’s third-largest oil consumer. These demand trends are reflected in the widening gap between WTI and Brent crude oil.

Since key emerging economies also show no signs of slowing or temporarily soft landing, I believe the gap between Brent crude, traded on the ICE Futures Europe exchange in London, and WTI crude, traded in New York Mercantile Exchange reached will remain elevated for a while and not contract as Goldman Sachs analyst expects!