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Wednesday, January 26, 2011

Questions on the WTI/Brent spread

I’m looking at something in the oil market and can’t make sense of it. Possibly someone could straighten me out.

The Brent/WTI spread hit $10 today. I can’t remember that happening before. The spread has been widening for some time. It jumped $4 recently.

The excuse offered is that the Cushing Oklahoma facility that is the settlement for the WTI contract is flush with oil. Not only is it full, a new pipeline is coming.

I find this interesting. It would appear that the US has a cheaper source of oil than does Europe. Yet we import more than half of what we consume. How do we save $10 over Europe? Do we really save that $10?

A significant amount of crude comes to the Gulf coast. That is priced as Light Louisiana Sweet (“LLS”). The LLS is trading at a premium to WTI of $8.50 LLS tracks Brent, at least it is now.

My questions are:

I) Is WTI a good measure of what the real cost of crude for the US is?

II) If the real cost is closer to Brent and therefore pushing $100 does it mean that we are about to see a big bump in gas?

III) Many (like Southwest Airways) hedged their fuel cost. Are “they” long WTI but paying LLS and therefore losing on their hedges?

IV) Is there a two-tiered energy market? If so, which region is paying LLS and which is paying WTI?

My answers, but I’m open to a better interpretation:

I) It used to be. But much less so today.

II) I think so. We will find out in 30 days or so.

III) I think some folks are getting creamed.

IV) I don’t know.



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8 comments:

  1. Southwest would hedge fuel cost with heating oil (similar to diesel).

    ReplyDelete

  2. 2007 anomaly from wikipedia:

    WTI usually commands a higher price than Brent crude does, but on May 24, 2007, WTI was priced at $63.58 per barrel as against $71.39 per barrel for Brent (Bloomberg). The anomaly occurred perhaps because of a temporary shortage of refining capacity. On April 13, WTI Crude at Cushing may have temporarily lost its status as a barometer of world oil prices[1]. A large stockpile of oil at the Cushing, Oklahoma storage and pricing facility (mainly due to a refinery shutdown[2]) caused price to be artificially depressed at the Cushing pricing point. As stockpiles decreased, the WTI price increased to exceed the price of Brent once again. [3]

    ReplyDelete

  3. its easy one.. Bruce..

    did you check USA import oil/oil products stats? i did..

    actually 12 month rolling summ is %negative against prev period.. so basically OIL imports in 2010 were less then in HORRIBLE 2009.. funny hah..

    but how.. oil is up,, recovery is treding.. but imports down/flat...

    cause its all fakes and lies..
    NO RECOVERY , NO HOUSING, NO DEMAND FOR OIL cause whose 17% underempl and 43+ mln on food stamps dont drive much

    alx

    ReplyDelete
  4. But What do I Know?January 27, 2011 5:49 AM

    Off-topic, but did you see the headline today that CBO says SSTF will run a deficit for the foreseeable future? How's it feel to be vindicated?

    ReplyDelete

  5. Bloomberg...

    Futures for March delivery rose as much as 80 cents to $86.99 a barrel on the New York Mercantile Exchange and traded at $86.65 at 1:31 p.m. London time. Brent crude for March settlement gained as much as $1.63, or 1.7 percent, to $96.88 a barrel on the ICE Futures Europe exchange in London.

    The spread between the two crudes rose to $10.08 a barrel, its widest in almost two years according to Bloomberg data, as accumulating inventories at the U.S. storage hub in Oklahoma depress the Nymex benchmark.

    Rising purchases of Brent crude contracts have driven holdings of the European benchmark oil grade to the highest level in five months relative to New York futures as investors bet it’s a better gauge of global demand.

    “The spread has widened and it is possible to widen more,” said Ken Hasegawa, a commodity derivative sales manager at broker Newedge in Tokyo. “Technically and fundamentally, WTI is in a weaker phase and it’s possible for it to go down to $85 a barrel. Inventories are high.”

    ReplyDelete

  6. What do I know:

    Tks for that. Yes I saw it. Yes it is nice to be proven right.

    ReplyDelete

  7. There is also a widening differential between Ural blend and Brent, it is linked to some disputes between Belarus and Russia over new prices of untaxed oil

    ReplyDelete

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