From BusinessWeek:
Oil Prices Keep Falling, But a Strange Gap Persists
Oil prices are down more than 20 percent since mid-March.
Yet that hasn’t erased a strange anomaly in the market: the gap between
two essentially identical types of oil. North American light, sweet
crude, also known as West Texas Intermediate, trades just below $84
while its international equivalent, known as Brent, is priced at $97.
Why
would two similar products sell for such different prices? The problem
is getting hold of WTI and connecting supply with demand. The gusher of
new domestic oil production coming out of shale deposits in North
Dakota, Texas, and Oklahoma has outstripped the country’s pipeline
capacity to move it around. The result is a supply glut that has built
up in the middle of the country, lowering the price of WTI. Refineries
along the Gulf Coast would love to get their hands on more cheap
domestic crude, but they can’t simply call an oil supplier and have a
load of cheaper WTI delivered whenever they want. While pipeline
projects to solve the problem are just getting underway, there’s still
no easy way to get large quantities of WTI down to the country’s
refining hub along the Gulf Coast. So refiners remain trapped, forced to
keep taking more expensive imported oil.
The discrepancy has
lasted a lot longer than most people thought. Although they’ve traded
within a dollar of each other for the bulk of the past 20 years,
starting in August 2010, WTI began trading below Brent by about two to
three dollars. By February 2011, the spread widened to $20 as domestic
production ramped up and turmoil hit the Middle East with the Arab
Spring, spooking markets with concerns over threats to supply. The gap
peaked at $27 last October, when Brent was trading at $114 and WTI was
close to $87. The gap is currently about $13.
One of the big
debates in the oil market right now is how tight that spread will get
over the next half a year. Opinions vary considerably. The energy guys
at Goldman Sachs, led by analyst David Greely, think that by the end of
2012 the price of WTI will be just $5 below Brent, largely because new
pipeline projects, such as the recently reversed Seaway,
will allow more domestic crude to reach refineries along the Gulf
Coast, making WTI more valuable. In essence, the more domestic crude
that reaches the Gulf Coast, the stronger the floor beneath the price of
WTI becomes....MORE
