The price of crude is a headline financial indicator. But in 2011, commentators and investors were confronted by an almost philosophical problem: what is the price of crude?
The world’s two big oil benchmarks which, historically, traded in parallel, slowly diverged.
Brent, from the North Sea, was $115 a barrel in mid-October. A barrel of West Texas Intermediate in the US was $87 at the same time – a $28 gap.
One price told a very different story about the global economy from the other. The price gap also muddied the thesis of investors who had bet money on commodities as a way to harness global growth and hedge against inflation. Oil was not following the script.
Reasons for Brent’s relative strength included the lingering impact of lower output from revolutionary Libya, a big crude supplier to Europe.
In the US, WTI’s relative weakness was partly explained by poor demand for motor fuel in an economy still not fully recovered from financial crisis.
But the best explanation for the wide spread is very local.
Thanks to resurgent production in the US and Canada, crude was flowing into the delivery point for WTI futures at Cushing, Oklahoma faster than it could flow out.
This led to concerns a glut would develop, depressing the WTI price.
Analysts were torn over how long this difference could last, with some projecting it would widen to $50 a barrel and others arguing traders would figure out a way to move cheap WTI-linked crude closer to the price of Brent.
On November 16, the latter seemed vindicated when Enbridge, a Canadian pipeline company, said it would purchase 50 per cent of the Seaway pipeline running into Cushing and reverse it to run south to the Gulf of Mexico. The spread quickly narrowed to about $10.
“Crude oil is extraordinarily efficient, internationally. Gaps that exist, exist for very short periods of time,” says James Dyer, chief executive at Blueknight Energy Partners and a senior executive at Vitol, the world’s largest independent oil trader. Blueknight owns crude oil storage tanks in Cushing.
Enbridge and its joint venture partner, Enterprise Products Partners, said the reversed line would carry 150,000 barrels a day by the middle of 2012. By early 2013, capacity would rise to 400,000 b/d.
JPMorgan, the investment bank, estimates that with the reversal, WTI crude’s discount to Brent will shrink to $5 a barrel by the end of 2012, and just a few dollars by the end of 2013.
But some estimates show the volumes Seaway will carry are far less than the amount set to pour into Cushing in coming years, as production bounces higher in places such as the Permian Basin in west Texas, the Bakken formation in North Dakota and Canada’s oil sands.
Other projects to avert a glut at Cushing, which held a record 42m barrels of stock last April, include unit trains carrying oil directly from North Dakota to the Gulf of Mexico, barges floating crude down the Mississippi River and plans by Magellan Midstream Partners to reverse a pipeline to funnel 135,000 b/d of crude from west Texas to the Gulf coast.
“You can’t just assume that oil is oil,” says David Greely, oil analyst at Goldman Sachs, the investment bank. “Location matters, and you need to pay attention to what is happening to the infrastructure underlying the individual markets.”
Source: http://www.ft.com/intl/cms/s/0/6032249a-2704-11e1-b7ec-00144feabdc0.html#axzz1i2iwpKa6
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