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Questions on the WTI/Brent spread
I’m looking at something in the oil market and can’t make sense of it. Possibly someone could straighten me out.
The Brent/WTI spread hit $10 today. I can’t remember that happening
before. The spread has been widening for some time. It jumped $4
recently.
The excuse offered is that the Cushing Oklahoma facility that is the
settlement for the WTI contract is flush with oil. Not only is it full,
a new pipeline is coming.
I find this interesting. It would appear that the US has a cheaper
source of oil than does Europe. Yet we import more than half of what we
consume. How do we save $10 over Europe? Do we really save that $10?
A significant amount of crude comes to the Gulf coast. That is priced as
Light Louisiana Sweet (“LLS”). The LLS is trading at a premium to WTI
of $8.50 LLS tracks Brent, at least it is now.
My questions are:
I) Is WTI a good measure of what the real cost of crude for the US is?
II) If the real cost is closer to Brent and therefore pushing $100 does it mean that we are about to see a big bump in gas?
III) Many (like Southwest Airways) hedged their fuel cost. Are “they” long WTI but paying LLS and therefore losing on their hedges?
IV) Is there a two-tiered energy market? If so, which region is paying LLS and which is paying WTI?
My answers, but I’m open to a better interpretation:
I) It used to be. But much less so today.
II) I think so. We will find out in 30 days or so.
III) I think some folks are getting creamed.
IV) I don’t know.
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My background in oil is more from the global stock picker side of things, but let me try to answer as best I can. One thing I can tell you is that although Brent is more sour/heavy and so logically should be cheaper than WTI, this is negated by European refineries having already made the necessary investments to deal with Brent.
I. WTI has never been the be-all, end-all of US oil prices but it's still a fairly good indicator and very good for its region. There is regional variation, and also the WTI is full of speculators and thus its prices move much more quickly and frequently, in either direction, than other US markets.
II. Not much. There are two components to the Brent/WTI spread: 1, Brent moving up relative to the global average oil price due to local supply/demand, and speculators front-running that, and 2, WTI moving down relative to the global average oil price due to local supply/demand, and speculators front-running that. The global average oil price is of course not published anywhere nor even counted by anybody. My sense is that it continues to rise gradually in dollar terms as the dollar weakens and the Saudis decline to lift output as quickly as Asian demand is rising.
III. Not so much, for the same reason as II. Only to the extent they have hedged with WTI and its price trend has diverged from the price trend of the actual products they buy. I really doubt the divergence is big enough to cream anybody.
IV. No, there's a thousands-tiered US oil market. It is very complex and there is significant variation by region, always has been. You've probably noticed that gas pump prices in your neck of the woods only track the broad oil price trends while ignoring WTI's frenetic speculative noise. That's the way it's going to stay.
Thanks Tom.
bk
It is a coordinated event. Europe can deal withe the price shock thanks to their infrastructure an dway of life. America is struggling now, imagine if prices were higher. it will not last though, and maybe not the night.
Bruce....maybe this explains it?
PS: There are some charts in there I could not copy over. Here is the link:
http://seekingalpha.com/article/248502-how-to-play-the-high-brent-wti-sp...
By Julian Murdoch
We often talk about the difference between Brent and WTI crude oil on this site. But never has the difference seemed so stark as now.
Brent crude, you may remember, is drilled from the North Sea oil fields and serves as the benchmark for European crude oil, while WTI (aka West Texas Intermediate crude) serves as the benchmark for U.S. oil.
WTI is a sweeter, lighter crude, and all things being equal, gasoline refiners prefer to work with WTI over Brent. Thus, in a vacuum, WTI should trade at a premium to Brent. But we don't live in a world of blind equality.
Looking back over the past five years (except for 2008, that is), WTI tended to obey common wisdom and run at a premium to Brent by roughly $2. But in 2008, the latter half of 2009 and now over the past few months, the two switched, with Brent trading at a premium—sometimes a substantial one—to WTI:
On Monday, that premium was $8.74—the largest spread seen over the past five years. So what gives?
Brent Trading Games, WTI Surpluses
Oil expert Chris Cook, former compliance director for the International Petroleum Exchange, points out that futures aren't what set the price of Brent crude. Physical cargoes coming out of the North Sea do.
"That amount coming out of the North Sea is gradually declining," he told Hard Assets Investor in a phone interview Monday. "It's been in secular decline for some time."
According to the Energy Information Administration, production in the North Sea in 2006 was 4.343 million barrels per day, but by the end of 2010, it had dropped 23 percent to just 3.348 million bpd. What's more, the EIA predicts this trend will continue to the tune of 185,000 barrels per day in 2011 and 156,000 bpd in 2012 (EIA's recent Short-Term Energy Outlook - Jan 2011).
New exploration licenses continue to be issued for the North Sea, and new discoveries continue to be made, but overall, says Cook, nothing can come close to slowing—never mind stopping—the production decline.
It hasn't helped that existing rigs in the area have had a few mishaps. Statoil briefly closed two of its fields in the North Sea earlier this month after a gas leak was discovered. (Combined, the two fields—Snorre and Vigdis—produce around 157,000 bpd.) Then just last week, Royal Dutch Shell closed four interconnected rigs in the original Brent field, when large hunks began falling off one. That took about 20,000 bpd off line, and the complex will stay closed for several weeks to come.
"The fewer and fewer cargos there are knocking about," says Cook, "the easier it is for people to actually influence [the price]. That is exactly what is going on—trading games. Hetco, the trading arm of Hess Co. in the U.S., has bought up roughly a third of this month's cargo and some of the next."
These "trading games among consenting adults," as Cook terms them, have gone on for years. But as Brent became a more widely adopted global benchmark in the 1990s, these trading plays began to affect the volatility of the global price of crude—and the Brent-WTI spread.
"I think we're seeing some games which have temporarily pumped up the arbitrage between the two contracts," he says. "Brent is financially pumped up, whereas WTI is more rooted in the underlying market because it is deliverable."
Physical delivery of WTI crude, which occurs in Cushing, Okla., has a real effect on crude prices due to the storage/delivery bottleneck that sometimes accumulates there. That means short-term inventory surpluses and deficits can have a significant impact on prices.
"Inventories in the U.S. have been coming down in the last few months, but there is still a healthy amount of oil in storage in the U.S., which tends to push the market more into contango,," says John Hyland, portfolio manager and chief investment officer of United States Commodity Funds LLC.
Indeed, according to the EIA's weekly petroleum inventory reports, inventories are still well above five-year averages, although they are lower today than in previous months.
So with tight supply and trading games pushing Brent prices up, and oil surpluses keeping WTI prices low, it only makes sense that the Brent-WTI spread should be as high as it is today.
But will the trend continue? No way to tell for sure. No matter—U.S. ETF investors can easily invest in either side of the spread.
Investing In The Brent-WTI Spread
Since USCF's introduction of the United States Brent Oil Fund (BNO), the fund is up 24 percent compared with the comparable WTI fund, the United States Oil Fund (USO):
The two funds are similar in that they both own a single, front-month contract and roll it two weeks prior to expiration. The only difference is USO owns WTI, while BNO owns Brent.
Although there's no guarantee that Brent will continue to outperform WTI, the future curves imply that maybe, it just might:
On the left, we've plotted the futures curve for both oil contracts over the next year. On the right, we show the historical cost of rolling that front-month contract over the last year.
Immediately obvious is that WTI is in fairly strong contango through the next year—a function of the aforementioned ample inventories. Brent's curve, on the other hand, remains comparatively flat, although technically in contango. If these conditions persist, then BNO will likely continue to outperform USO simply because of the roll cost—although all it takes is a drop in U.S. inventories to quickly flatten the WTI futures curve and change the picture completely.
So what's an investor to do?
One option would be to buy one and sell the other, depending on which way you think the spread is going to go, and take advantage of the arbitrage between the underlying crudes. With Brent at such a tremendous premium, it's a tempting play, although a flattening of the WTI curve could work against you.
Another option is to pick the crude that aligns with your investment strategy, whether it's something U.S.-centric or a more global approach. Hyland sees real opportunities in the latter.
"If you're bullish on oil because you're bullish on India and China, you're already halfway there to being non-U.S. centric. You've already concluded that the price of oil is no longer solely dictated by how many people are going to drive to Disneyland this summer," he says. "So take the next logical step and think about what kind of oil exposure you want to buy."
In the end, when it comes to crude, it pays to remember that more options exist than just plain old WTI.
From - SeekingAlpha
don't know much, maybe the refineries which would use WTI are backed up, with the CAFE rules,its hard to say which oil is needed for which part of the country, which needs gasoline formulated for their environmental requirements. crude is not entirely fungible, like wheat for instance.
and after Obamas speech last night it may be that the country is headed for some single gasoline formula. he did appear to cave on regulations. and finally the US policy has always been to buy foreign oil, and husband our own, for the day when there is none (of theirs)left. we also have a lot of gold, although rumor has it that Obama flew out of the country last night, the AF! could barely lift off the runway, destination unknown. (you laugh Bush did that a couple times)
Some stuff from memory, possibly from the oil drum discussing the price action of 2008 a while after the facts:
Qualtity-wise WTI should be more expensive then Brent.
The WTI contract has a fairly narrow spec; if this oil is plentiful in Cushing and some different quality is in short supply - too bad.
There is no mechanism permitting to replace WTI with a different oil and adjusting for quality.
If the demand for WTI downstream from Cushing is low and the tanks are full, prices will go down even if different grades out on the ocean are in short supply.
Related to that I read that WTI gets less important in price setting because of the narrow market (sorry, no source archieved).
The oil market consists of much more then WTI and Brent; all are characterized and priced by light/heavy and sweet/sour.
The relative prices could vary depending on refinery capacity and end product demand. If during the run-up in prices 2008 sufficient refinery capacity was concverted to heavy and/or sour crude that usually trades at a discount WTI might be oversupplied in Cushing and too cheap relative to the world market.
In conclusion, a two-tiered market is a simplification.
Bruce, sorry about your sewer problem. Check for monster root-growing plants in the vicinity. As for the oil spread, there is no demand in the US for oil. Can't fill up tankers with the shit cuz they are stacked up in the Gulf to offload to Cushing. Not a plot, just a major SNAFU with the moron oil boyz.
(Well, demand is there, but the ability to pay is lacking. Hence the price drop. Fooking CNBS watchers!)
jeez it's not peak oil, not even related USD weakness esp on the Brent Crude just cornering. That's it!
What you want to watch is when hedge funds/oil trad firms start to short. That's a crash trade right there
Already WTI is under pressure.
This is an anomaly; maybe the first time in the history of the two leading oil futures markets that the spread has been this wide for so long. There is no explanation for it in the physical market. If anything there is a grade premium for WTI over Brent in most refineries, and physical oil can be re-routed between the US Gulf and Europe (including long haul crude enroute from the Persian Gulf) for under $2/bbl. That leaves at least $8/bbl of the gap still to be explained, with the most likely explanation being that someone is squeezing the shit out of someone else in the futures market trading game.
Once again, the paper commodity markets controlled by the financial industry (aka major trading banks) stray far afield from the physical markets and the forces of physical supply and demand while the CFTC watches …. Oprah I guess.
http://img84.imageshack.us/img84/9089/brentwti.jpg
Maybe this sheds some light;
Tapis as it is probably an indicator of where demand growth will be coming from. It hit a high at $105 on the 13th and is now trading down at $100.
UK Oil rebounded today off $95 and is pushing a range top around $98 which it has been bumping up against since the 13th.
What does that mean for WTI? Don't know, but Faber has called a sharp shift coming for emerging markets and a correction in US equities of about 10%.........and, get long USD.
Judging by the FED today the FED looks to be frontrunning Faber with a unanimous vote to extend low rates indefinitely which begs the question over how the US GDP # may print.
The FED knows already.........my best guess given p/a post FED minutes is a tipoff to the print which may disappoint like the UK's
Primary Marker Crudes
WTI (US)
Brent (Europe/Africa)
Dubai and Oman (ME)
Tapis and Dubai (Asia)
Excellent call on the EURJPY, by the way. :D
Dorothy sends her regards.
Why you are so lovely to mention that call, and fank you for the kind words Orly, but who the fuck is Dorothy?........the only Dorothy i ever knew was a beautiful black 23 y/o jamacian girl with a body to die for.
eat your heart out krasting. it is all true.
btw.......i loaded up on shorts last night into the FOMC.........may not have been the brightest trade placement but the bailout worked about 30 minutes after around overall b/e price.
the compass seems to be kind of fucked up, if you know what i mean.
you know, for what it is worth i tracked out the UK GDP prior to the miss and had that pit feeling somebody got the number before it was made official.........probably will be buying rounds in Davos and laughs to boot...........talk about class distinctions.
us peons have NO FUCKING idea let alone clue........crumbs for the winter sparrows.
You're short EURJPY? Hasn't gone anywhere for three days. Getting kinda dull.
Oh and you asked me what I thought Dorothy and Toto may do with the EURJPY, so technically it wasn't me...
ok, yes it was.
That was a long play from just > the 107.50 area. Took it off at the 112.50 so left $ behind, but who knew.
The shorts were MiniDow and DAX at 11975 and 7145.......exited both at as close to entry just after the FOMC minutes which looked depressing.
Also shorted the AUD/USD at 0.9975 and exited with some profit.
Shorted the Euro last night at 1.37 for a quick trade but am also out as of early this AM.
Was long USD/JPY at 82.55 but closed at a 40 point loss yesterday.......it looked like it was poised for lower prices.
Guess that was the wrong call........have to love the way the rating agencies pop surpries, ie., Japan, out of the blue that way.
yoyo.. I like Tyler's "cornering" link... always an angle. And I will admit the "financialization" of the commodities markes has really fucked things up quite a bit -- at least 40% of the price differences can indeed be due to open interest etc and maybe as tyler points out some market cornering... (I know chocfinger's partner by the way)
but I think there are much simpler explanations - and will go to my "old school" fundamental hat -- which used to explain 99% of the price changes in the commodity and now maybe explains 60% of the moves... ps I have been oil trading p/t since 1997 and read more than I care to admit on the subject... but in short there are a few factors:
1- supply / demand funamentals of the LOCAL market (ie Europe vs. US)
2- Price differences in Grades. BUT WRONG -- which is very counter -- WTI is very light/sweet, sour/heavy are more difficult to refine hence why some older Opec oils sell at a discount to WTI. Brent is heavier/more sour than WTI)
3- Transport costs in markets (for Aribtrage differential) -- yes boyz if its cheap enough we can get a tanker full and pay day rates and arb the price differential by Delivering to Rottedam -- BUT WRONG shipping rates are going down...
this leaves us back to #1 and yes as someone raised above - Cushing has an oil glut. This folks is the sad state of affairs in the US: While the globe is on a tear and emerging markets are going crazy with growth, the real growth we have is that in our asset markets. I consider this a GREAT alternative indicator that US demand is weak and US production is reviving -- so we have a better supply demand balance.
(I think of it like a magnet -- yes each local market has its supply/dmd factors -- but the global trade (And shipping arbs) affect "pull" the local markets' pricing to the global ones...
The other side of the coin -- North Sea production has peaked big time folks. There is less of the stuff being produced regularly. Demand is soft too - agreed but between a weak europe and a Peak Oil scenario in the North Sea, and a very weak US economy coupled with modest production gains -- the US is the shorter midget and WTI.
Caveat is I cant back up with any charts / data now -- so someone please post. But I have bbeen seeing these trends in the data for several months and offer this quick explanation as its the only thing that comes to mind quickly. its possible someone smarter than me can ppull out a data point and prove me wrong - but again as memory recalls these are basic trends I have been seeing.
PS these trends are also majorly amplified with Nat Gas. We are the new kings of the stuff, and its far less of a global market. Spot Nat Gas prices are fatter in Asia by far and also less so in Europe but fatter than US given our massive supply glut.
As for WTI/Brent -- as long as US is soft, production is strong - canada oil sands keep pumping and north sea production keeps diminishing - expect Brent to remain at a premium...
So you say there IS a two tiered market. I ask how much does it cost to get Cushing to the Gulf?
It can't cost $8.50 can it?
bk
got one more for you... this gent says basically what I say but in LONG FORM... and more elegantly...
ssynopsis: As I noted earlier, the price of WTI is heavily influenced by the picture for US crude oil supply and demand. The current high inventories of crude are weighing on WTI prices.
http://www.marketoracle.co.uk/Article874.html
from Cushing to the gulf, then on a VLCC tanker - tanker rates are $20,000 per day and a 10 day voyage. There are all sorts of other fees and commissions that go on top of this.
As there is time to transport, you have to take on some market risk -- ie. you are delivering 30 days out too.
I am getting way over my skis -- I know a very tiny bit about this -- but you get the point... there are guys who arb this stuff all day long. That spread in costs + profit etc will always keep the global markets relatively similar in pricing.
I really think the big issue is Brent (which is a basket of North Sea Oils) is in serious decline. That area has Peaked Big Time... production is declining... unless demand in europe collapeses Id predict a Brent to maintain its spread for some time...
link to a 2008 presentation on peak oil by the head of the petroleum institute of UK...
www.peakoil.net/iwood2003/ppt/SkrebowskiPresentation.ppt
Tks D
WTI..$87.33
Opec Basket...$91.80
Brent..$97.45
The real key is to look at Canadian, Mexican, Venez. and US and average. Canada and US tend to be the cheapest..Mex/Venez follow OPEC. Brent, Malasia, Indonesia, etc.. tend to be the most pricey. Quite simply the fields are either difficult or there isn't much.
Canada and US also have alot of subsidies to keep prices down. So we know those 'evil corporate subsidies' won't be cut unless a large chunk is to be cut out of the GDP.
To see the whole biscuit... http://www.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm
Did Zero Hedge cover the Armajaro hedge fund buy up of cocoa in 2010...?
the market sqeezed them and went short, they lost a ton. Most 'cornred' manipulation plays go south.
The comment above about the UK is interesting as I just finished Harvey's blog where he opines that the BOE may be in deep shit because GLD actually has "borrowed" all their real gold. Are they playing with oil to offset potential losses, like JPM with CU? Die you GLD phony paper bitches, HSBC and all the rest.
Link, por favor?
all those disaster made billionaires will go up in smoke with the gld
Let's not forget, this, according to Barry "two years AFTER the recession" so I would not get too worked up. There is still plenty of magic fairy dust to go around. Dow hits 12 large and there is blue sky on the horizon-life is good.
Good luck figuring oil pricing . It's so speculated out by non endusers in the shadow markets that the value cannot be determined by simple supply/demand graphics. International discord, yes. Even the FX movements seem detached from pricing. Risk is on, too much fiat sloshing around and since '08 the boyz know resistance is about a buck and a half on a barrel and $ 4 galUS before the serfs overwhelm the Beltway.
Maybe in '11 the tolerance level will peak at $ 3.75/gal . All we know is that pump prices are a serious monkey wrench thrown into the gears of the central planners.
you are right rainman. very hairy. used to be clean.
Unless your country happens to be Norway, of course. In which case it's a cakewalk.
Bruce,
Read about the original MR Copper: Yasuo Hamanaka. We currently have massive excess risk in the market. Someone/a firm is trying a rogue trade looks like it's on Brent.
Is A Good Old-Fashioned "Market Cornering" Scheme Responsible For The Brent-WTI Divergence?
Can't be. It's not just Brent that is spread. Tapis is spread. Alaska is spread. Louisiana is spread. Venezuela is spread. Kuwait is. All oil varieties are priced way the hell above WTI. It's not a cornering of Brent or Brent would have spread huge against all the others, and Tapis is pouring into Asia.
The issue is WTI is absent transport. The pipelines are filled with imports, and a helluva lot of it is from Canada. Texas only produces 3.5 mbpd. Refineries don't value it as they used to. They can use other API grades just as readily. There is no longer a reason to prefer something that is hard to transport.
Hey, I was gonna say that! One of the best responses came from Stuck on Zero, who said...
"The story behind this is intriguing. It begins with the UK Weather Service knowing that a terrible, glacial winter was in store for the UK based on the path of the jet stream. Instead of informing the public that it was in for arctic weather it told everyone the winter weather would be mild. Brent futures went low and people on the inside purchased huge blocks of Brent Crude futures. Now, with glacial weather upon the Isle Brent futures are soaring and people are living in unheated homes. Will there be an investigation?
A proper reference is here:
http://www.telegraph.co.uk/topics/weather/8237397/Met-Office-kept-winter...
_____________
:D
Is there any more sickness to be dredged up here?!?! This is getting way beyond disgusting. Chimpanzees wouldn't treat each other like this.
Seriously, what the hell is the matter with this world where we would as soon have old women in their homes freezing so we can make a buck?
I don't know you!
blame govt's and central banks that allowed risk to come back and full speed. Particularly Ben Bernanke with his insane USD debasing.
Hedge funds/commod traders just rose to the occasaion. But once they start shorting each other...
Chimpanzees wouldn't treat each other like this.
True, but Chimps never decided to move out of tropical forests into snowy hinderlands.
Hmmm. You mean we moved from a natural environment where we were individually self-sufficient to one where humans would have to rely on each other to survive?
Maybe that will be our ultimate undoing...
yes, copper too and ETF gold.
Is Suncor frontrunning a close in this spread today I wonders? They don't produce the good stuff, after all, and 4% in a day is a notable gain for their share price, even considering the increase in $/bbl. I suppose it could just be peeps positioning for earnings in Feb. too...
Suncor is a very quiet money machine. They are now up to 320K bpd and they *own the reserves*. Their agreements with Alberta are in place. Total has begged them to partner with another upgrader (each upgrader does 150K bpd).
This company is grinding out additional production each year of an item whose price is rising. Their costs are defined. A nice place to park long term money.
Call of Due-D
Upgraded synthetic crude trades at a premium to WTI.
http://www.reuters.com/article/idUSN1815422220110118
!
Well that was edifying, thank you very much.
Best Regards
Damit Bruce you hit the nail on top of my head - I was just discussing this with a colleague today and we are both at a loss as to the last time this happened (we have both been round the block for 20 or so years) and neither of us could name or remember a time. Didn't have time to run a bloomie chart before locking the door for the day but would also love to hear any and all opinion on this. Something stinks fo sho!
know your enemy
you don't think storage capacity could cause this?
Never has before - so maybe we are totally awash, more so than we have ever been. Not sure Troll, just one more first time in forever event to add to the list of weird shit.
there be no shelter here
Bruce, you've been a posting machine recently and the stuff is all top notch. Keep up the good work.
I'm snowed in. Half crazy. Want to hear a funny story? I wrote this to a friend just now:
Snowing like a mother fucker. 25 degrees. What a day I had.
Another sewage explosion in the basement. I almost killed myself last time. But I was desperate and did it again. When I dig the hole and expose the pipe much to my surprise there was no water. Meaning the clog was inside the house. A whole different problem and a wasted two hours digging a hole. So I call Rotorooter and they say they will be by in an hour. Five hours later a guy from Columbia shows up at the door.
I say, "I'll show you the problem". He says, "I have a problem, my truck is at the bottom of the drive way." I say don't worry. I will drive down with my truck and get your equipment. Come with me now". He says, "My truck is blocking the driveway". I say, "Don't worry about the fucking truck". So I drag him to the basement and we talk sewage for a bit. But the guy was not really listening.
We get in my truck in the fucking blizzard and go get the equipment from his truck we need. I get around the bend and sure enough his truck is blocking the driveway. But the guy failed to tell me that he slid off the road at the turn and was now sideways on top of the stone wall. A complete fucking disaster.
A big tow truck is required as this is a monster Ford truck and very stuck. Fat chance in a blizzard. So I get my tractor and a long chain and for over a fucking hour I yanked this fucking big truck around. The Colombian guy thought I was insane. But I got it out. My guess is that the body damage I caused would cost less then $2,000. It might be worse than that. After an hour of being nice with it I just yanked the shit out of it. There could be some of that frame damage...Speaking of damage the pony padock was destroyed in the process. It will have to be reseeded and will look like shit and cost $500.
Anyway the Rooter Rooter guy is shitting his pants over this and says has to leave and can't fix the fucking drain. I flip out and threaten to sue. I told they guy I wanted $300 for the tow job. So we're yelling at each other in the fucking blizzard. Anyway I started laughing at the ridiculousness of the situation. And that got the Colombian laughing too. So we parted pals. Go figure.
Friggin Hilarious....thanks for sharing.
Where you continuosly have to dig up the pipe you should put a clean out pipe. (google it for images) .
also you might want to buy one of these
http://compare.ebay.com/like/370467261935?var=lv<yp=AllFixedPriceItemT...
Will save you a bundle in the long run .