Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Diverging Crude Oil Prices WTI $12 Cheaper than Brent, Anybody Got A Big Rig?

Commodities / Crude Oil Feb 21, 2011 - 02:57 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleOn Wednesday, Feb. 16 Israel said Iran is sending two warships into the Suez Canal on way to Syria, and that the action is considered a “provocation.” Due to the long history of bad blood between Israel and Iran, this very possible scenario was enough to even send the bear-infested NYMEX crude oil futures volume surging midday.

West Texas Intermediate (WTI) on Nymex rose to just below $85, while Brent crude on the ICE futures exchange spiked $2.17 higher to $103.81 a barrel--a 29-month high--widening the WTI-Brent spread to a new record near $19.


High Middle East Tension

Then on Friday, Feb. 18, AFP reported that permission has been granted for Iranian warships to transit the Suez Canal into the Mediterranean. Canal officials say it would be the first time Iranian warships have made the passage since the 1979 Islamic revolution, while Israel has labeled the Iranian action as "hostile' and said Israel was closely monitoring the situation.

As the worst Israel-Iran conflict scenario failed to materialize, at the close Friday Feb. 18, Brent crude oil for April settled at $102.79 while WTI for April delivery rose to $89.71, narrowing the spread to $13.11.

Crude Glut at Cushing, OK

Since WTI is lighter and sweeter crude which requires less processing, it has historically enjoyed a $1 – $2 a barrel price premium to Brent crude oil. According to Bloomberg, the WTI-Brent gap averaged only 76 cents last year.

However, WTI’s premium disappeared about a year ago and in recent days it has been trading at more than a $10/bbl discount to Brent mainly due to rising inventory levels at Cushing OK, the delivery and price settling point of Nymex crude futures (See Chart). 


Source: Bianco Research via The Absurd Report

WTI Undervalued by $12
Energy research and consultancy firm John S. Herold noted that from a historical point of view, the Brent premium was often short-lived. Since the U.S. economy is growing more rapidly than those of most European countries, Herold believes WTI may be undervalued by $12 per barrel as compared to Brent.

WTI Premium May Never Return

Meanwhile, Deutsche Bank thinks the historical WTI premium to Brent may never return and that Brent premium seems to have shifted to a level of $2 to $3 a barrel from the typical historical discount of $1 to $2 a barrel.

For now, between the two oil markers, Brent seems to have the pricing momentum since it is undersupplied, and more likely to be jolted by the geopolitical unrest in MENA (Middle East and North Africa) due to Europe’s close proximity to the region, and the end markets Brent serves.

Cushing Logistic Fix by 2014

The problem with Cushing is that The U.S. oil infrastructure is built around the country being an oil importer with pipelines mostly flowing from the coast to inland.

Many analysts don’t see infrastructure could improve at Cushing any time soon to move crude to the coast and world markets, while oil production from Canada and U.S. oil shales like the Bakken play in N. Dakota are set to rise adding to the glut.

Credit Suisse, for example, sees it will most likely be 2013 or 2014 before the pipeline infrastructure could improve the situation at Cushing.

Beneficiaries - Gulf Coast Crudes

When Brent is higher than WTI, it also drives up the price of low-sulfur U.S. grades that compete with international oils priced against Brent. The recent spike in Brent has sent the premiums for the Gulf Coast Grades--Light Louisiana Sweet (LLS) and Heavy Louisiana Sweet (HLS) crudes--to the highest levels (above $20) against WTI since at least 1991.

Among producers, the largest beneficiaries of this Brent premium include Canada's Nexen Inc. (NXY) and Talisman Energy Inc. (TLM), and U.S.-based Apache Corp. (APA).

Product Prices Trend With Brent

Meanwhile, with the growing disassociation of the WTI to global markets, the domestic petroleum product prices, particularly distillates, have pretty much ignored WTI and are trending more with Brent. The chart below illustrates this trend where United States Brent Oil Fund (BNO), an ETF, was used as a proximate for ICE Brent.

Beneficiaries - Midwest Refiners

Inland crude in the U.S. is getting cheaper, while petroleum product prices are trending with the higher-priced Brent. Theoretically, this means higher crack spread for refiners, but not all U.S. refineries can get crude at the low WTI benchmark price. WSJ quoted Valero (VLO) that logistical restraints at Cushing have limited Valero to only about 300,000 barrels of WTI a day.

So, only a few Midwest refiners (PADD 2, where Cushing is) with access to Cushing are able to take advantage of this WTI pricing anomaly. Delek US Holdings Inc. (DK), Frontier Oil (FTO), Holly Corp. (HOC), Western Refining (WNR) and Valero (VLO) are among the lucky ones that could see higher earnings in coming quarters.

Anybody Got A Big Rig?

Bloomberg quoted Raymond James that producers can ship crude via rail to the Gulf Coast for about $4 to $6 a barrel and by truck for between $8 and $10 a barrel. Many market players reportedly are using rail and truck shipments to move the glut out of the Cushing to the Gulf Coast where the same barrel of oil would trade at much higher in recent days (see chart below).

However, the economics of these alternative transportation modes--trucks in particular--would only work if the spreads stay elevated at the current levels. According to Bloomberg, the WTI-Brent spread between the June contracts already dropped to $9.41 from $11.35 on Feb. 16. And capacity limit of these alternative transports will be another factor.

ConocoPhillips already said it isn’t interested in reversing the Seaway pipeline that brings crude from the U.S. Gulf Coast to Cushing, Ok. So, with Cushing storage near 39 million barrels, barging, rail, trucking, and possibly some pipelines reverse flows may help ease the bottleneck at Cushing and narrow the WTI-Brent spread, but they are unlikely to significantly improve the WTI predicament in the next 18 months or so.

Disclosure: No Postions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at http://econforecast.blogspot.com/.

© 2011 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules