Is A Good Old-Fashioned "Market Cornering" Scheme Responsible For The Brent-WTI Divergence?

Tyler Durden's picture

In the past several months, energy traders have been scratching their heads over the curious and disturbing divergence between Brent and West Texas Intermediate. At last check the spread between the two was over $6 per barrel. And while some have tried to explain the delta through a fundamental difference in qualities between the two products, the answer may be far simpler, and mirror comparable behaviour seen recently in the "cornering" of various precious and industrial metal markets. As Reuters reports, "oil trader Hetco has taken
control of the first eight North Sea Forties crude oil cargoes
loading in February and two Brent cargoes, giving it significant
influence over the spot market, trade sources said on Tuesday.
Brent and Forties are both part of the BFOE North  Sea
benchmark, which comprises Brent BRT-, Forties FOT-E,
Oseberg OSE-E and Ekofisk EKO-E and acts as a basis for the
settlement  of ICE Brent crude futures LCOc1.
The BFOE benchmark is also used to value millions of barrels
per day of physical crude oil in the Atlantic basin.
" This makes sense: after all what better way to shift the supply/demand equilibrium than to drastically limit supply. And in a market in which demand is increasingly irrelevant (it will pick up... eventually), a real supply shortage may very well lead to accelerating draw downs in inventories, which is the surest way to get crude into the triple digit range.

More from Reuters:

Hetco is an independent trading company partly owned by and backed by U.S. integrated oil and gas company Hess Corp. (HES.N). It has been active in the North Sea oil market for several years, traders said.

Energy and metals market reporting agency Platts, part of publishers McGraw-Hill (MHP.N), which has for decades provided price assessments for North Sea crudes, has changed the basis for its benchmarks several times in an attempt to minimise the potential impact of supply squeezes.

North Sea oil traders described Hetco's acquisition of the February cargoes as the basis for a "trading play" and said that the company had been actively offering February Forties cargoes on Tuesday at prices above the last set of deals.

"If other companies cannot cover their positions, they are going to have to pay up," said one trader at a large U.S.-owned house, who declined to be identified.

How big is the size of this possible manipulation?

Hetco now has control of 30 percent of the Forties and Brent programme for February -- eight of the 25 February Forties cargoes, traders said, as well as two of the eight Brent cargoes loading next month.

Forties cargoes are typically of 600,000 barrels each.

And just how much does it cost one entity to allegedly manipulate the world's crude supply? "At around $98 per barrel, each Forties cargo is now worth
almost $60 million."
Call it $600 million. Pocket change for anyone close enough to the Fed's discount window (or some bank's excess reserves). The IRR? Orders of magnitude higher.