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Prices of gasoline and crude oil
Here I comment on some recent developments affecting the prices of WTI, Brent, and gasoline.HT: FT Alphaville's The Closer post
West Texas Intermediate is a particular grade of crude oil whose price is usually quoted in terms of delivery in Cushing, Oklahoma. Brent is a very similar crude from Europe's North Sea. As similar products, you'd expect them to sell for close to the same price, and up until 2010 they usually did. But an increase in production in Canada and the central U.S. combined with a decrease in U.S. consumption has led to a surplus of oil in the central U.S. This overwhelmed existing infrastructure for cheap transportation of crude from Cushing to the coast, causing a big spread to develop between the prices of WTI and Brent.
Black: price of West Texas Intermediate, in dollars per barrel, weekly Jan 7, 2000 to Feb 8, 2013; blue: price of Brent; green: Brent minus WTI. Data source: EIA.
The Seaway Pipeline last month completed a capacity upgrade to move 400,000 b/d from Cushing down to the Gulf, though there have been some initial additional temporary infrastructure challenges with processing that new flow at the receiving end. The Gulf Coast portion of TransCanada's Keystone Pipeline Project is expected to be moving an additional 700,000 b/d from Cushing to the Gulf by the end of this year. That's going to happen regardless of whether President Obama decides to approve the separate northern portions of the Keystone Project, though political and legal obstacles could still slow completion of the Gulf Coast portion as well.
Eliminating the Brent-WTI price differential would require that any arbitrageur could buy another barrel in Cushing and transport that additional barrel to the Coast at low cost. We're still a long way from that. We need not only to balance current flows of supply and demand, but also to work down the inventory of oil that has piled up in Cushing. Commercial crude oil inventories in PADD2, the oil district including Oklahoma, today are 50 million barrels higher than they were in 2008.
Until we reach that point of having the logistical ability to transport easily as many barrels as desired out of Cushing, the only way for the Brent-WTI price gap to close is if the extra supply delivered to the coast is enough to actually bring down the world price....MORE