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Guest Post: Dirty Rotten Scoundrels

Tyler Durden's picture





 

Submitted by Rob Kirby

Dirty Rotten Scoundrels

The purpose of this paper is to draw particular attention to the recent disparity in crude oil prices – namely the difference between two benchmarks - West Texas Intermediate [WTI] and Brent [North Sea] Crude.  Historically the price of WTI trades at a premium to lesser quality Brent North Sea Crude.  This
paper lays out the case that the extreme, existing, observable price
discrepancies is likely the result of engineered and arbitrary market
manipulations – to be discussed below. Such arbitrary price
manipulations in the oil markets impact negatively on the oil exporting
economies and show favor to oil importing economies.

 

The following chart depicts the most recent data available of Total imports of crude by the U.S.:

 

#f0f0f0; padding: 2.4pt; background-color: transparent;" colspan="6">

Total Imports of Petroleum (Top 15 Countries)
(Thousand Barrels per Day)

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Country

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Nov-10

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Oct-10

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YTD 2010

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Nov-09

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YTD 2009

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#f0f0f0; padding: 2.4pt; background-color: transparent;">

CANADA

#f0f0f0; padding: 2.4pt; background-color: transparent;">

2,510

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2,345

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2,516

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2,565

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2,458

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MEXICO

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,363

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,345

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,272

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,084

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,211

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SAUDI ARABIA

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,141

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,121

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,094

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858

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1,016

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VENEZUELA

#f0f0f0; padding: 2.4pt; background-color: transparent;">

942

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930

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993

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874

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1,082

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NIGERIA

#f0f0f0; padding: 2.4pt; background-color: transparent;">

860

#f0f0f0; padding: 2.4pt; background-color: transparent;">

872

#f0f0f0; padding: 2.4pt; background-color: transparent;">

1,021

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980

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789

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ALGERIA

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572

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451

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509

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400

#f0f0f0; padding: 2.4pt; background-color: transparent;">

488

#f0f0f0; padding: 2.4pt; background-color: transparent;">

RUSSIA

#f0f0f0; padding: 2.4pt; background-color: transparent;">

553

#f0f0f0; padding: 2.4pt; background-color: transparent;">

655

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620

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415

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580

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COLOMBIA

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492

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422

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377

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237

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281

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IRAQ

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340

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143

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421

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461

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462

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ANGOLA

#f0f0f0; padding: 2.4pt; background-color: transparent;">

276

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324

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397

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431

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477

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VIRGIN ISLANDS

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234

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270

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260

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205

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276

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                                               Source:  #0000ff;">US. EIA [partial chart]

 

Within the past two years, a number of the worlds’ oil producers/exporters have dropped the #0000ff;">WTI benchmark for sales of crude oil to America and others:

Tuesday, November 24, 2009

Earlier this month, the world’s largest oil producer set the table for a move away from traditional light, sweet crude oil.

Saudi
Aramco, the state-owned company of Saudi Arabia has decided to drop
West Texas Intermediate (NYMEX: WTI) as the basis for pricing its oil
sold to the U.S. market
. The Saudis priced off WTI for 15 years.

Why?
Well, quite simply, WTI crude oil is dangerously volatile – as
evidenced by the drop from $150 per barrel to $30 crude over the past
year.
[Ed. Note:  We
suspect the real reason for dropping the WTI benchmark is for reasons
that are not politically correct to repeat, read on, below]

In its place, Saudi Aramco will start using the Argus Sour Crude Index (ASCI),
which measures heavier oil with higher sulfur content. Traditionally,
heavy, sour crude is cheaper than WTI. Heavy crude requires extra
processing at the refinery to remove impurities, which is why it’s
discounted.

So what? Why does it matter that one company is changing its benchmark for oil from January 2010? Let me explain…

Current Benchmarks at Risk

The primary benchmarks for crude oil are…


  • WTI, which measures onshore light, sweet crude in Texas.
  • Brent, which measures light, sweet crude on the north shore of Europe.
  • Omani crude on the Dubai Mercantile Exchange (DME). …

……After Saudi Aramco announcement, Venezuelan
president Hugo Chavez said his country would follow its lead in using
ASCI as the benchmark crude import to the United States
.

 

And
there is also speculation that many Canadian producers, particularly
those planning to use TransCanada’s Keystone Pipeline, will do the same
thing.
 [Editors note: Canada #0000ff;">remains benchmarked
to WTI or derivatives thereof for crude exports]

 

 

Argus
sour crude is an INFERIOR PRODUCT TO WTI and normally sells at a
discount [WTI is currently trading at 89.00 – arguably, a difference of
close to 7.00 in the wrong direction]. Here is its current price:

 

#333333;">ICE Asci Crude March 2011 (ZUH11)

#f0f0f0; padding: 0in 6pt 0in 0in; background-color: transparent;" valign="top">

#404040;">95.65s#333333;">    -1.42 (-1.46%)#333333;">#10466d; text-decoration: none;">#333333;">

#404040;">Commodity Price Quote as of Friday, Feb 4th, 2011 (ICE)#333333;">

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">High

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">95.65#333333;">

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">Low

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">95.65#333333;">

#f0f0f0; padding: 2.4pt; background-color: transparent; height: 0.15in;">

 

#333333;">52Wk High

#333333;">97.70#333333;">

#333333;">52Wk Low

#333333;">70.81#333333;">

#f0f0f0; padding: 2.4pt; background-color: transparent; height: 0.15in;">

 

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">Open

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">0.00#333333;">

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">Prev Close

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">97.07#333333;">

#f0f0f0; padding: 2.4pt; background-color: transparent; height: 0.15in;">

 

#333333;">Volume

#333333;">0#333333;">

#333333;">Open Interest

#333333;">0#333333;">

#f0f0f0; padding: 2.4pt; background-color: transparent; height: 0.15in;">

 

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">Weighted Alpha

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">+30.09#333333;">

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">Standard Dev

#eaeaea; height: 0.15in;" width="644" valign="top">

#333333;">-0.98#333333;">

#f0f0f0; padding: 2.4pt; background-color: transparent; height: 0.15in;">

 

#333333;">

 

Argus
Crude futures and Brent North Sea Crude futures both trade on the
Intercontinental Exchange [ICE] – which is London based and not nearly
as American biased / influenced as West Texas Intermediate [WTI] which is the underlying commodity of New York Mercantile Exchange's oil futures contracts.  Essentially,
the difference between the two pricing regimes is that ICE is European
[World] centric while the WTI is more reflective of “made in America
pricing”.

 

CONCLUSIONS:

 

Saudi
Arabia and Venezuela are predominantly selling the U.S. lower grade
SOUR CRUDE – at the aforementioned elevated price which is a stiff
premium to WTI.  By extension, they are likely
selling their higher grade sweet crude to OTHER NATIONS [like China,
Europe] at the MUCH HIGHER Brent Benchmark price.

 

#0000ee; text-decoration: none;">

 

#0000ee; text-decoration: none;">

#0000ee; text-decoration: none;"> 

#0000ee; text-decoration: none;">#000000;">

#0000ee; text-decoration: none;"> 

Free or ‘Fixed’ Markets?

 

The
output of Canada’s oil industry is being sold at a discounted benchmark
price relative to what other major oil producers are receiving. This –
at least in part - explains why Canada’s Current Account [Trade] surplus
has narrowed so much [and gone into deficit] in recent years. 

 

 

We
suspect this is the REAL REASON why many of the world’s oil producers
went off the WTI benchmark – it appears to be “arbitrarily discounted”.  Canada, and perhaps Mexico, by using this discounted price - are receiving LESS.  This is compromising their trade balances and hence their national finances.  Remember folks, TRADE DEFICITS DESTROYED AMERICA as much or more than their budget deficit.  Canada today is [conservatively] receiving $10.00 per barrel LESS than it should be.  10.00 per barrel x 2.5 million per day = 25 mill per day or 750 million per month or 9 billion / yr. – just for crude oil.

 

Now consider: that despite being a net energy exporter, #0000ff;">Canada also imports large amounts of energy products:

 

Domestic crude accounts for only about 45% of Canada's
oil consumption. Imports represented the remaining 55%, mostly coming
from either North Sea countries or the Middle East. Imported oil feeds
refineries mostly in Eastern Canada.

 

In fact, Canada imports close to 1.1 million barrels of oil per day:

 

 

                                                          source:  #0000ff;">C.I.A.

 

So,
Canada’s trade picture is actually getting a “double whammy” -
Exporting CHEAP, UNDERPRICED HIGH-GRADE crude to the U.S. and Importing
more EXPENSIVE LESSER-GRADES from Europe and the Middle East [to the
tune of losing an additional 10 bucks per barrel on another 1.1 million
barrels per day].  In economic parlance this is called “buying high” and “selling low” or a great recipe for ‘going broke’.  No wonder Canada’s trade picture has soured so much.

 

Now
stop and consider that the price collapse of Natural Gas from the 15
Dollar level [13.00+ level in North America] was concurrent with that of
crude oil – and the European price of Nat. Gas is now in 10.00+ region
today versus 4 bucks and change in North America:

 

 

 

 

The
notion that Nat. Gas is purely a “regional market” and North America is
‘awash’ in natural gas to explain the price disparity between North
American and European product is “#0000ff;">disingenuous gibberish
”. 

 

The world's largest proven gas reserves are located in Russia, with 4.757×1013 m³ (1.68×1015 cubic feet). With the Gazprom company, Russia is frequently the world's
largest natural gas extractor. Major proven resources (in billion cubic
meters) are world 175,400 (2006), Russia 47,570 (2006), Iran 26,370
(2006), Qatar 25,790 (2007), Saudi Arabia 6,568 (2006) and United Arab
Emirates 5,823 (2006). It is estimated that there are also about 900
trillion cubic meters of "unconventional" gas such as shale gas, of
which 180 trillion may be recoverable.#0000ff;">[4]

 

The
natural gas price in North America is determined by the “paper trade”
in the same way that precious metals prices are determined by the sales
of a hundred ounces for every physical ounce in inventory.

 

More
specifically, the price of Nat. Gas in North America has been
determined on the trading desk of J.P. Morgan Chase since Jan. 2006 when
J.P. Morgan entered the Nat. Gas futures trading arena to ‘exterminate”
and take the other side of their ‘serial long’ customer – Amaranth’s
trades.  This is extensively documented in a 2007 treatise titled, #0000ff;">Derivatives Disaster: Deriving The Truth

 

Notice
the demarcation point [from mid-2008] when America began “rigging”
energy prices in earnest – something documented back in early 2009 in a
treatise titled, #0000ff;">Oh Yes They Did!
 

 

The key point explained in Oh Yes They Did!
was the fact that the U.S. Dept. of Energy [DOE] acknowledged in their
2008 annual report that crude was diverted from the Strategic Petroleum
Reserve [SPR] in June 2008 due to high prices:

 

                      source:  2008 U.S. Dept. of Energy Annual Report

 

Caught in a Lie?

 

Interestingly
and in conflict to this June 2008 DOE acknowledgement was this crass
attempt at revisionism when citing these same crude oil movements in
their 2009 Annual Report for the Strategic Petroleum Reserve – #0000ff;">where they stated
[pdf. pg. 58] that oil was not diverted until Sept. 2008 due to HURRICANES:

 

          Oil Deliveries

When Hurricanes Gustav and Ike struck the Gulf Coast in September 2008,
they impacted oil production, refining, and distribution operations
that led to shortages of both crude oil and refined products. The
Secretary of Energy utilized the authority of section 161(g)(1) of the
Energy Policy and Conservation Act (EPCA) (42 U.S.C. 6241(g)(1)) to
authorize the test of Strategic Petroleum Reserve response capabilities
through limited test exchange contracts that would release emergency
crude oil to refiners and help mitigate the severe regional supply
disruption.

 

Take a look at when the price of crude COLLAPSED in 2008 and ask yourself which of the above explanations makes more sense:

 

 

If
the sad tale told above is not enough – one should consider that the
U.S. Agencies responsible for tabulating “official inflation rates” –
like the Producer Price Index – they use the “manipulated and depressed”
WTI price in their calculation as evidenced by the EIA’s admissions #0000ff;">here
.  We
know they are using WTI because their reference chart does not reflect
recent prices of ASCI [sour crude] or Brent Crude – the real benchmark
prices being paid:

 

 

This only lends more credence to the work of those like John Williams of Shadowstats.com who point out how corrupt and misleading official inflation data really is.

 

This is the true state of our capital markets, folks. 

 

What a disgrace.

 

 


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Thu, 02/10/2011 - 18:33 | Link to Comment FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Seriously, name a market that isn't manipulated? Is there one, seriously? Anyone?

I see no free markets anywhere, therefore they are not markets by definition. The markets, just like every aspect of the world, is controlled by a handful of people. These 'markets' are just an instrument to transfer wealth from us to them.

Thu, 02/10/2011 - 19:36 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

 

What a disgrace.

Guys, did it occur to you that this fake, artificial, non-market WTI "benchmark" pricing for Canadian oil is just a (not so) clever scheme by oil companies to cheat on Canadian taxes?

I.e. Canadian citizens are the losers here - their national treasure trove is being systematically looted here.

 

Thu, 02/10/2011 - 18:33 | Link to Comment Bigger Dickus
Bigger Dickus's picture

Long WTI, short Brent FTW. And don't chicken out like the Netflix guy.

Thu, 02/10/2011 - 18:36 | Link to Comment Rainman
Rainman's picture

So the PPI is gamed with WTI figures....??  The Peanut gallery says that's a fuckin' brilliant sleight of hand.

Central planning stats are like a magic show.......audience keeps trying to figure out how the magicians do it.  

Thu, 02/10/2011 - 18:37 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

NWO, coming soon to your wallet (or man-purse if you are in China).

http://money.cnn.com/2011/02/10/markets/dollar/

The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.

Thu, 02/10/2011 - 18:40 | Link to Comment Ragnarok
Ragnarok's picture

Canada is the 51st state, what do you expect?

 

http://www.cbc.ca/canada/story/2011/02/04/harper-obama.html

Bye-Bye Canadian Sovereignty! 

Fri, 02/11/2011 - 00:40 | Link to Comment hewhohesit8s
hewhohesit8s's picture

bullshit.  If you don't realize how different the two countries are, you haven't spent enough time in both.

Thu, 02/10/2011 - 18:42 | Link to Comment Flakmeister
Flakmeister's picture

How long can it last?

This will backfire in the NG market, producers that didn't hedge are losing money on every well that has been drilled recently. When these guys go tits up, and they will, NG will rocket. CHK is selling the Haynesville plays, there is another tell.

Buy unlevered NG and WTI assets... not futures, physical that is in the ground.

Fri, 02/11/2011 - 01:51 | Link to Comment whatsinaname
whatsinaname's picture

If it were not for fiat money (since 1971) NG would be at $3 and crude at $25 and GDP 1/3 of current levels - check charts at chartsrus.com

Fri, 02/11/2011 - 09:27 | Link to Comment Flakmeister
Flakmeister's picture

That is a purely hypothetical situation. The US had no choice but to go to fiat. One reason the US had to embrace pure fiat was oil, they had to pay for the imports. Recall US production peaked in 1970. Look at production and import curves.

http://mazamascience.com/OilExport/

Thu, 02/10/2011 - 19:04 | Link to Comment Pure Evil
Pure Evil's picture

Damn, the Virgin Islands pumps oil?

What don't they do?

Everything from beaches to babes to beer to offshore banks.

And, OIL.

Thu, 02/10/2011 - 19:14 | Link to Comment gwar5
gwar5's picture

All the stats are lies. Where are Canada's own stats though?

They should know they are playing with Soviet style criminals these days. Everybody else does.

Thu, 02/10/2011 - 19:26 | Link to Comment Jasper M
Jasper M's picture

Notice that, whenever any aspect of market action fails to deliver on inflationist predictions (e.g., WTI, & silver), it is always the result of "manipulation". Funny, such theories are seldom voiced when things go Up (despite being more likely).

Oh, well, life on Earth.

Thu, 02/10/2011 - 20:48 | Link to Comment SashaBelov
SashaBelov's picture

Ok, supersmart Jasper, than just explain us yesterday's 15+ spread in brent/wti - its crazy 6sigma, which could never ocure without manipulation.

 

And btw: how is market not manipulated when it's cornered by one or two players? Well, that is silver story - and there is no question about this anymore.

Thu, 02/10/2011 - 20:05 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

This is a profoundly disappointing article.  More time seems to have been spent colorizing and bold-izing text than doing quality investigation / analysis.

>>

So, Canada’s trade picture is actually getting a “double whammy” - Exporting CHEAP, UNDERPRICED HIGH-GRADE crude to the U.S. and Importing more EXPENSIVE LESSER-GRADES from Europe and the Middle East [to the tune of losing an additional 10 bucks per barrel on another 1.1 million barrels per day].  In economic parlance this is called “buying high” and “selling low” or a great recipe for ‘going broke’.  No wonder Canada’s trade picture has 

>>

Canada exports oil to the US (95+% of its exports) and much is from  western Canada (Alberta).  That oil is increasingly the result of tar sands extraction.  It is not "cheap, underpriced HIGH-GRADE crude".  It is low grade crude that only excellent refineries can handle.  

Canada's major population centers are in its east, far removed from the oil production, and they don't have enormous pipeline networks that stretch across the continent.  THIS is why they import oil.  Not from any special imbalance.  It's a geography issue.  Furthermore, they consume about 2.15 mbpd and have refinery capacity of only 1.6 mbpd.  

I don't quite see why this author doesn't see how the pipelines define the difference in price.  Refinery technology can handle lesser quality oil than in the past without requiring a lower oil price.

This is not rocket science.  The big demand growth is in China and India.  They can get Brent.  They can't get WTI because the pipelines don't ship WTI to Houston for export.  They flow only northward.  Changing that would disrupt a great deal of distribution of the 19 million bpd the US consumes.

Brent is priced higher than WTI because it is in more urgent demand from the fastest growing economies than WTI.  That being said, if the spread gets big enough, someone will persuade someone else to reverse a few pipelines and presto, increased WTI price.  

 

Thu, 02/10/2011 - 20:02 | Link to Comment gookempucky
gookempucky's picture

Ive always enjoyed Rob Kirby but

Argus sour crude is an INFERIOR PRODUCT TO WTI -sorry Rob just not true --the ASCI was designed to basket many types of crude into one price mechanism and there are many many types of crude. WTI averages an API of 32-38 depending on the blending (pipeline which could be 1-6) types of crude running through said pipeline. ASCI crude averages 35-45 API some even register 60 API.

Canada is moving to the ASCI pricing mechanism as is the rest of the world and as such makes the grip on America setting the world oil price over. Totally agree that our stated inflation numbers are based using WTI thus lowering the number.

As for API  for west coast WTI -midway sunset 13-san joaquin light 28-US Gulf API mars 28-poseidon 31. Without blending you just dont get sweet.

Thu, 02/10/2011 - 20:13 | Link to Comment Yen Cross
Yen Cross's picture

Michael Caine and Steve Martin. Need I say more? Great acting!

Thu, 02/10/2011 - 20:21 | Link to Comment buzzsaw99
buzzsaw99's picture

the oil at cushing is easily manipulated because they have limited storage and it really isn't fungible. Once it gets there it is stuck. as with everything else the notional paper market is much bigger than the actual physical.

Thu, 02/10/2011 - 20:38 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Pretty much that.  Brent is now the price of oil.  Not WTI.

Thu, 02/10/2011 - 21:07 | Link to Comment Yen Cross
Yen Cross's picture

  I was wondering when you were going to pop in. Thanks. Made my day.

Thu, 02/10/2011 - 20:44 | Link to Comment asdasmos
asdasmos's picture

Where is Harry and all the idiots touting APPLE now?

Thu, 02/10/2011 - 21:09 | Link to Comment Yen Cross
Yen Cross's picture

Leaving prototype !5's in various coffee houses around silicone valley.

Thu, 02/10/2011 - 21:40 | Link to Comment nevadan
nevadan's picture

The notion that Nat. Gas is purely a “regional market” and North America is ‘awash’ in natural gas to explain the price disparity between North American and European product is “disingenuous gibberish”.

The author doesn't appear to know much about natural gas production.  There is in fact a glut of natural gas at the present time.  Improvements in drilling and production technology that resulted in a drilling boom and many new productive fields are now coming on line.  There is a lead time from the end of a drilling campaign through the construction of metering and gathering systems and the transportation pipelines to the main trunk lines that service the ultimate markets.  Those new wells have hit the supply chain recently and there is presently lots of gas available.   Natural gas is a regional market for the most part since distribution is limited by the pipeline systems that can transport it unless it is liquified for bottle transport.  Having said that there is no doubt that the big money crowd does push the market around, but the fundamentals still apply too.

Thu, 02/10/2011 - 23:27 | Link to Comment Flakmeister
Flakmeister's picture

  Yes, there is a current glut or sorts, it was overdrilling of the new shale gas plays when NG was ~$8-14. A lot of operators are loosing on these plays where they overpaid for the leases. And the leases are use it or loose it, so gas is being produced at a loss. (Better a middling loss than a complete writeoff).

The shale gas well flows decline very quickly, hyperbolically at first, then exponentially.  It is difficult to estimate when, but that glut will soon vanish and nat gas will stabilize at ~$7 per mcf which is the price where shale gas is viable.

Thu, 02/10/2011 - 21:48 | Link to Comment Yen Cross
Yen Cross's picture

 Have fun everyone. Gotta trade Asia. It's gonna be a good one, after HoodMi MooBarek decided to stay on.

Thu, 02/10/2011 - 22:07 | Link to Comment Not Sure
Not Sure's picture

Lots of charts scare doomers; me like. It reminds me of the old ZH.

Thu, 02/10/2011 - 22:11 | Link to Comment r101958
r101958's picture

Great research and article. I have been questioning this for about a month or more now and this is the first informed article on the subject that I have seen. Thanks!!!

Fri, 02/11/2011 - 03:56 | Link to Comment JW n FL
JW n FL's picture

My $125 December looks good, no scratch that... great.

Fri, 02/11/2011 - 06:47 | Link to Comment falak pema
falak pema's picture

by the way they have found oil in Mubarak's pyjamas. Its not sweet like WTI but then its been aged by a cahoot whose bottled it up for thirty more years. Any takers? Is worth its weight in gold. Bids end on monday next week. His pee shooter may go dry by then. Especially if the crowd in Tahrir square want a free bath. Maybe our man in Washington will ask all those aircraft carriers to pump it up and dump it on NY, NY. 

Fri, 02/11/2011 - 07:44 | Link to Comment jp
Fri, 02/11/2011 - 11:12 | Link to Comment snowball777
snowball777's picture

FAIL

Fri, 02/11/2011 - 11:46 | Link to Comment darkpool2
darkpool2's picture

Canadas greatest, and should be most urgent, need is to improve its western transportation routes, -----road, rail, pipelines----so that Cdn resources can flow to Asia. This article merely confirms the opportunity costs of being locked into a single major customer ( aside from being paid in shit fiat ). All would rebalance quickly if there were good alternative trade routes. What better investment use for the oil sands raoyalties than opening those new trade routes?

 

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