Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Worse than Watergate - Release the Memo - Investigate Uranium One - 23rd Jan 18
CAT Stock Bouncing after JPM Upgrade How High and How Long Can This CAT Jump? - 23rd Jan 18
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

The Battle Between WTI and Brent - Why the Oil Price “Spread” is Getting Tighter

Commodities / Crude Oil Apr 30, 2014 - 10:34 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: The spread between WTI and Brent is tightening again.

What’s “the spread?”…

It’s the difference in price between what crude oil futures cost on the NYMEX in New York (the West Texas Intermediate rate) and the rate set in London (the Brent rate).


As of this morning, this spread stood at 7.2% of the WTI rate (the more accurate way to register its impact in the U.S. market).

It had been as low as 3.6% earlier this month, after hitting double-digit levels for most of 2013, when in some cases the spread jumped to over 20%.

Both of these represent oil that is sweeter (with less sulfur content) than 80% of the oil that is traded internationally on a daily basis.

These futures contracts are the principal “paper barrel” benchmarks against which the prices of the “wet barrels” (actual consignments of oil) are determined.

As this spread continues to narrow, it promises to create some direct consequences for investors.

Let me explain why this situation has suddenly changed…

The Battle Between WTI and Brent

Of course, it wasn’t always this way. Before August 2010, WTI would actually cost more than Brent since it was a better quality of crude.

But there were two things that changed this long-time relationship.

The first was that Brent became far more used as a benchmark in most regions of the world. The second was the growing situation at Cushing, Okla.

Cushing is where the WTI daily price is pegged. It is the single largest confluence of crude oil pipelines in the country. That presented a problem: There was consistent inability to move volume out of Cushing, creating a giant glut.

In turn, that glut depressed the price of WTI even more.

As a result, Brent priced at a premium to WTI for each daily session since August 16, 2010, except one.

Therefore, “the spread” for the past forty months has favored Brent and that has led to some rather direct consequences.

For one, it has actually improved the bottom lines of refineries. The rise in the relative cost of imported volume allowed processors to pass on increasing wholesale prices for oil products. The refiners were actually using more domestic production, as the increasing reserves of unconventional oil (tight and shale) came on stream. But given the integrated nature of the global market, the higher prices for Brent allowed for improved refining margins (and thereby profits) domestically.

For another, the upper hand given to Brent also tended to exacerbate its price volatility resulting from geopolitical events. The Arab Spring, Iran, Syria, Ukraine, unrest in Venezuela, and saber rattling from China all magnified Brent’s price given its closer connection to the broader markets.

And as it stands, Brent remains the standard for European usage, while the continent is far more dependent upon imports from precisely those same areas where unrest has been on the rise.

The Ongoing Effect of Swaps on Brent

Then there is the added element of contract swaps.

One noticeable change taking place in the global oil sector, especially over the past three years, has been the increasing use of swaps to facilitate export exposure without requiring the actual transport of oil.

The following example of an ongoing series of actual swaps provides a very good illustration of how this works. LUKoil (OTC:LUKOY), Russia’s largest independent producer/refiner had two needs.

The first was the need to supply a string of service stations acquired on the U.S. East Coast with oil product. The second was to expand elsewhere in the Western Hemisphere.

The initial demand for gasoline and other oil products resulted in short-term interim agreements with Exxon Mobil Corp. (NYSE:XOM) refineries to provide oil products since most of the retail locations they acquired were either Getty or Mobil branded outlets. But the Russian major also needed additional sourcing as it searched to acquire its own processing facilities in North America.

That was secured from Venezuelan state company PDVSA, who also happens to own the CITGO chain (and several refineries) in the states.

But the relationship developed much further into general ongoing contract swaps.

PDVSA was interested in securing end users in Europe, while LUKoil had the same interest in South America. Neither company, however, could absorb the cost of using tankers to move oil across the Atlantic.

Instead, the two companies swapped consignments.

LUKoil would agree to release oil from its storage terminal in the Netherlands to new PDVSA clients in Europe. Meanwhile, the Venezuelan company would release volume to new LUKoil customers in South America. So long as the grade of oil released in both locations was the same, the buyers could care less.

These swaps have been added to the types used normally by oil traders who are acquiring actual wet barrels in various parts of the world. As a result, the international market has become even more integrated, with prices impacted by exchanges taking place well beyond a particular region or domestic demand base.

This development also supported a higher Brent premium over WTI, since it is the benchmark more relied upon to set crude oil prices worldwide.

The End of the Brent Premium

However, we are now seeing a gradual end to the Brent premium, and with it some changes in the domestic market pricing in the US.

One reason for the contraction in this ongoing spread is the end of the Cushing glut.

New pipeline capacity is now online, transporting crude south to the petrochemical complexes on the Gulf Coast. That is beginning to remove the most apparent artificial depressant on WTI, thereby increasing its price.

Second, as I have previously noted, the emergence of U.S. refineries as the leading exporters of oil product internationally has placed a new stage in contract swaps. This involves crack spreads – the difference between WTI and Brent as applied to the differentials among crude and various oil product rates (primarily gasoline, diesel, and low sulfur heating fuel).

Only a few years ago, the expansion or contraction in the Brent-WTI spread would have been viewed as a primary indicator of raw material pricing only. But no longer.

As this spread tightens, it will affect both refinery profits and their competitive positioning for both servicing the rising domestic demand and expanding exports abroad.

I’ll be following this situation as it develops, since there will be some investment plays to make as a result. So stay tuned.

Source : http://oilandenergyinvestor.com/2014/04/oil-price-spread-getting-tighter/#deeplink

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 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