The Light Sweet Dire Divergence: Just Another Paper vs. Physical Disruption?

Tyler Durden's picture

Over the past few weeks we have dedicated quite a few articles to the WTI-Crude spread which today once again hit an all time record wide (here and here). Yet no matter the reason for the divergence, what is certainly lacking are explanations for why arbitrageurs have not stepped in to take advantage of this mispricing. While there has been much speculation, nobody has provided a comprehensive answer. Until today. Below we present the Weekly Tanker Opinion from Posen & Partners, "Light Sweet Dire Divergence" which gives what we believe could be the most credible explanation. Bottom line: just like in gold, there appears to be a dramatic divergence being created between the paper and physical markets in WTI. "The Brent crude oil benchmark currently represents the pricing benchmark for over 65% of the world’s traded physical crude oil. The WTI contract represents a pricing benchmark for about 30% of the world’s traded physical crude oil, while physical supplies of WTI are quite scarce. It should be noted, most of the crude oil being priced off the WTI contract is already trading at a significant premium to the contract itself implying that the market has already compensated for WTI’s lack of physical relevance. This could explain why shipping rates have remained depressed in the face of such a dramatic price discrepancy between the two contracts. It would also support the growing chorus of analysts, traders, and pundits calling for the Brent contract to be more indicative of fundamental demand for physical  crude oil (versus speculative demand for paper WTI contracts)." Much more in the full note...

Light Sweet Dire Divergence (pdf), from Posen and Partners