Crude on the Wide - Why?

Bruce Krasting's picture

We set another record yesterday. This one has me scratching my head. The Brent WTI spread widened to $27.22. That’s never been seen before.

There are some partial explanations for this phenomenon. Brent is lighter in grade and justifies a somewhat higher price. But not $25.

Another consideration is the increasing flow of crude from the Bakken field in North Dakota. This crude often heads to Cushing, Oklahoma, and therefore creates a supply glut. The WTI price should be lower than Brent based on this. But, one again, $25 seems out of whack. The smart guys up in NDAK are also sending crude by trains to the Gulf area where prices are higher.

Another consideration is that WTI is a hedging mechanism for algo computers. When there is announced evidence of a slowing economy the markets all react. If economic activity is in decline it makes “sense” that crude should trade lower. Computers that are trying to move risk around buy bonds and sell crude. The WTI contract is the place for this type of market force to be settled.

So which price is right for crude? Is it Brent or is it WTI? The answer, to me, is that Brent is the benchmark to look at. WTI (and the futures pricing behind it) has little to do with the cost of petroleum in the US. Consider this chart of LLS crude. This is the pricing for ‘sweet’ crude for cash delivery at the Gulf of Mexico.

What is very clear is that the cost of crude used by US refiners to produce gasoline has nothing to do with the WTI price. LLS pricing has been running a $3-4 premium over Brent for some time now. That, to me, makes perfect sense.

A shipment of Nigerian crude (sweet) has two destinations. One is Rotterdam, the other is the GOM (Louisiana offshore delivery). The shipping cost for GOM delivery of a VLCC (1mm barrels of crude) is about $4/Brl higher than for European delivery (4-6 extra days of transit). Therefore a pricing matrix where LLS is equal to Brent +$4 is consistent.

The price of gasoline for much of the country is driven by crude pricing in the Gulf; not Cushing, Oklahoma. At yesterdays closing price for LLS the price of gas is going higher in the USA. So another big drag on the economy is in front of us.

Some thoughts on this.

A few months back the smart folks at the Department of Energy tried to influence the LLS pricing by releasing crude from the SPR. That worked, for about a week. The LLS/WTI spread was about $15 at the time. Given that it is much higher today I think it is possible that D.C. will again choose to sell some more of the strategic holdings of crude in an effort to create a cheaper cost for gasoline. If the DOE was in for a penny in June then they should be in for a pound (or two) right now. One can be sure that the interventionists in Washington are teeing this up as I write.

I can’t come up with a logical explanation for the huge WTI/LLS pricing differential. With a spread of $27 one could fill up a few hundred-car trains in Oklahoma and ship the excess crude to the Gulf. With the spread as wide as it is, a train full of crude could drive back and forth across the continent a few times before getting to the final destination and still end up cheaper that $27. So what gives?

I smell manipulation in this. What it comes down to is that the price of crude that we actually use to make gas has little to do with the price of crude that is traded on the exchanges. Why?

We know the US economy is broadly in decline. We know that $4 gas is a factor that will accelerate the downward economic forces. We know that $115 crude (lls/Brent) will translate to $4 gas at the pump. We know that the “deciders” love to intervene to “fix” things that are broken.

My conclusion? The DOE will be doing Round II of SPR sales. This will happen in the near future. When that happens some fat cat oil companies will make a bundle (they did last time). But like the SPR sales in June there will be no lasting effect on market prices. Gas is going up in price, and it’s going to stay high. Just another gloomy factor in an already gloomy economy.

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chinawholesaler's picture

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Joy on Maui's picture

not long ago Seeking Alpha featured a post claiming that the runup in Brent was essentially a flight of money from holding Euro into something more substantial.....

janus's picture

yeah, i've been eyein that spread since june as well.

seemed like easy money, too good to be true; so i've stayed away -- good thing.

why, oh wyh, is janus learning markets at a time such as this.

the dozen or so books i've poured over are, in the context of these marketst, absoutely worthless.

it' all about looking for manipulation and fraud and trying to time it with some modicum of success right now.

and then, of course, there's gold -- and they are running (SNB, anyone?) out of options to tinker with the shiny stuff quickly!

so, they are FORCING the world to destroy its own economy by trying to game everything.

gold: the atomic weapon of Truth -- le bomb neutron.

the clock is ticking, tptb.  think we're gonna empty our accounts to satisfy your fucking tricks?

keep playing -- we're catchin on.

see if you can keep this market floatin by mid-week next.  janus don't think you can.

Amish Hacker's picture

So much of this sounds like another overly managed market, silver, where you have a paper, fractional reserve market (Comex), supposedly setting the world benchmark price for the commodity. But guess what, when you go looking for the actual physical commodity in the real world (say, Ebay or Rotterdam) you can't get it for anywhere near that price.

From time to time the largest market participants dump real product on the market, via central bank leasing and SLV shennanigans in the case of silver, or via Strategic Petroleum Reserve releases in the case of oil, and the real-world price comes down, at least temporarily.

But local price distortions in Cushing caused by unique circumstances like pipeline and storage tank constraints will not figure into the world price of oil for long. When the paper price of oil traded in the WTI sandbox gets too far out of line, the other kids will just go play somewhere else.

nah's picture

cheap oil is dead


long live cheap oil

boiltherich's picture

Given TARP, QE1, 2 , 3 and a couple of trillion dollar jobs programs that produced no noticible change in unemployment, given the price of an avocado at Safeway, givnen utilities up by over 20% in two years, given all that has happened in prices since the collapse of 2008, I would say that oil is cheap.  Oil was brushing 80 when gold was still 250, now gold is up in the 18-1900 range, oil is still in the 80's.  What has not changed is wages.  Wages in nominal terms are pretty much the same as when Clinton was in office, but real wages are as much as 40% lower, and more important real wealth per household is down by half.  Thank you George Fucking Bush!  Oil and gasoline seem high to the average person, but only because the average person has lower income. 

mcarthur's picture

This is no different than the Alberta natural gas bottlenecks experienced in the 80's and 90's prior to decent pipeline capacity being established.  The spread is essentially the incentive to build the pipelines.

Flakmeister's picture

True, I don't see the spread lasting once Keystone XL approaches completion.

the grateful unemployed's picture

a president would manipulate energy prices in an election year? bruce say it ain't so. and to be contentious the IEA is an international organization, and if Obama wanted to hide behind their umbrella I am sure some GOP Republicans would call shenanigans. but ultimately the administration wants ten cent a gallon gasoline and hundred dollar oil, and big oil would squack about that plan, but they (UST/FED/POTUS) have done this with food producers and just about every other corporate entity, Bernanke gives them free money, to buy shares and otherwise generate earnings with financial engineering gimmicks, while their margins are getting squeezed. the real fear of course is that without the free money tight margins will create an earnings downdraft.

the reason why they want $100 crude is the same reason they want all asset classes to rise together, including gold. once gold breaks, head for the hills, and leave the pick ax and the mule behind.

bbbilly1326's picture

Would Nigeria's and China's agreement to settle Nigeria's oil sales to China in Yuan have this effect ?

Michael66's picture

Why the spread?

Because there is a glut of diesel, gasoline and jet fuel on the American market and demand for petroleum based fuels is declining.

Bio diesel is now being produced at the rate of 90 million gallons per month in America. This production is increasing rapidly.

Ethanol is displacing petroleum and at the same time producing millions of tons of feed mash for export from America.

Bio jet fuel is quickly coming onto the aviation fuel market. All airlines are in the process of lining up supplies of bio jet fuel because it burns cleaner and is 10% more efficient than petroleum based jet fuel. (Lufthansa is now flying some of its scheduled routes with bio jet fuel.)

ALL airlines will HAVE to switch to bio jet fuel in order to be competitive.

The US Air Force is to complete its switch to bio jet fuel by the end of 2012.

Americans are driving less. Buses are converting to natural gas.

The long and the tall of it is that fuel supplies in America are in a glut situation at the same time demand for petroleum fuels is decreasing.

the grateful unemployed's picture

decreased demand, increased supply: see Natgas and fraccking, see biofuels, see electric cars, see solar power, (see consumers selling electricity to the grid)

all these things reduce end demand or increase supply.

now Bruce wonders why crude is $100, while Bernankes monetary policy targets the general class of commodity assets? Is he really targeting assets or just trying to keep interest rates low, and he doesn't mind what speculators do as long as it doesn't hinder economic growth? if asset prices fall, and we should think housing here, then the fed is in deep water.

asset prices are inversely correlated to interest rates? pretty much.

we're staring at a massive deflationary event, Bernanke has in finger in the dike, but $50 crude is the next target (see WTIC, P&F charts)

Flakmeister's picture

In the event of a massive deleveraging event a la Lehman/AIG crude *may* spike down to $50... I seriously doubt it though. Exporters will simply scale back production to maintain price.....

The marginal cost of a new barrel of non-OPEC production is at least $70 per barrel. 

Kayman's picture


1. What is the sociial overhead per barrel for ME oil ? What does Saudi Arabia spend to keep the citizens from revolting ?

2. What is the U.S. Military cost per barrel of ME oil delivered to the U.S. ? 

Flakmeister's picture

1. It spends as little as it can... I believe it needs ~$80-85 dollar oil to balance its budget....

2. Too much.... I have heard numbers to the effect of $400 per barrel. But here is the catch, what would America buys its oil with if that oil was not priced in dollars?.... Just so you know, putative Ft. Know reserves buy approx. one year of net US imports.

surfersd's picture

One last note. Energy markets have done this before due to transportation glitches. Note the billions spent on LNG import plants around this country on the idea that the rest of the world would ship us their natural gas. Oops! We developed frack drilling and our nat gas prices have plummented, while in Europe where nat gasa is tied to oil prices skyrocketed. Some times even the big guys get it wrong.

Flakmeister's picture

Yep.... you should look at LNG and TOO as possible plays.

surfersd's picture

The offshore delivery point is called LOOP Louisana Offshore Oil Port. There is no manipulation it is just that the massive amount of crude coming from the Bakken and increase production from oil sands has got ahead of the building of the keystone pipeline. If there is any manipulation is the refusal of Oil companies to reverse the lines that are currently running north. 

Flakmeister's picture

Define massive amount of crude.....

Sure PADD 2  production is rising, 780,000 bpd last time I looked, the Bakken is about 1/2 of that.

Do you know the current capacity of the pipelines between Cushing and Gulf coast?

boiltherich's picture

I try not to get sucked into details like this, but I recently read that a recent increase in pipe capacity from Cushing to the Gulf of 56,000 bbl/d made little difference because refiners could not absorb the extra capacity.  The story did not say whether that was a structural capacity limitation or if it were temporary due to maintenance or a switch in blending for the end of the summer production runs, but with capacity in general running in the 80% range it should not have been a problem - unless Gulf refiners perhaps are stuffed with SPR oil not yet used.  I still think Libya (Arab spring uprising in general) has more to do with the spread as you can see the problem grew in tandem with fear over producing nations.  I usually defer to experts within any given field, but it is hard to trust oil traders isn't it? 

janus's picture

if you've ever watched the development of an opec meeting (start to finish -- pomp before, parade after) you'll know to NEVER trust an oil trader. 

just listen to the rumors evolve -- disparate ain't the word for it, BTR -- morph, reclaim certainty, qualify, dither, reverse totally, and, finally, they'll look back, find the one prognostication that fits the outcome, and say with bravado and bluster, 'i knew it all along'.

well, that's been the case since about 87'.  before that, janus don't know.

just look for the outcome most accomodating to the anglo-saxon super structure, and that's the safest bet.  i'm startin to see oil going into a free-fall -- but, again, DO NOT bet on this.  it's only a guess right now.

we'll know by the end of this month.

surfersd's picture

all of the pipelines between the gulf and Cushing rund north to south. EPA has delayed the approvals for Keystone of course causing the spread tostay wider longer. There is also a new discovery coming in Ohio and Illinois which will be a world class prodcution field 1. 00 mm/bd

gorillaonyourback's picture

some are starting say bullshit about that new oil shale discovery, look at stock price CHK

Flakmeister's picture

Yes.... see the chart for EVEP? It is a liquids rich Utica shale play, not oil per se.

surfersd's picture

While I have enjoyed this site immensely it as need be is very finanace weighted. What many outside of the deep insides of Wall Street don't realize is that the huge money over the years has been made and still made by the oil traders. Drive around the harbor in the town of Southport where 10 of the 15 mansions that ring the harbor and golf course are owned by guys who have traded oil.

It is not manipulation, it just guys trading in a market that utilimately is determined by fundamentals. As dumb money (thinking it is smart money) keeps coming in the opportunities continue to multiply. 

Flakmeister's picture

Here are the bio-diesel statistics

Now compare it to consumption

Do you see a problem?

You claim about the Airforce is horseshit, quit making stuff up. 

There is a glut at Cushing, national fuel supplies are not in a glut....

steve from virginia's picture

There are as many theories about the spread as there are analysts, many of these are in the industry. Theory here ... theory there, all are entertaining.

I personally don't see anything different taking place in crude or in gold/silver. Futures market makers need a sump where they can lay off a lot of risk. W/ Treasuries at the ceiling because of an ongoing flight to safety, a large paper market is needed where hedges can be created. Enter WTI.

WTI is multiples of contracts greater than Brent, which represents more cash in 'play'.

If (when) shortages appear in the world markets (due to excess wasteful consumption) the WTI price will respond appropriately: cross-market hedges will be unwound (profitably).

The low price means somebodies are selling ... and other somebodies are buying! Right now the selling somebodies are getting rich in non-crude markets, next week (year) some other somebodies will get rich in the WTI.

Simurgh's picture

I think its partly that and partly the fact that WTI traded at the CME and at ICE have position limits.


Brent traded on ICE does not. 

Inspector Bird's picture

I do not follow oil, nor am I familiar with the markets, so I'm going to make some naive comments and ask some naive questions:

1.  Generally speaking, the economy is slowing, and most people here agree.  This SHOULD mean the price of oil will fall.  But it isn't - why?  Since I do "follow the money", I believe it's because of the Fed's ridiculous policy of supporting the deficit by printing money.  Is that accurate?  Is that why people believe the price of oil will only climb?

2.  The spread, such as it exists, shouldn't be so large (stating the obvious), but shouldn't the spread be reversed?  Isn't it more costly to ship Nigerian and Brent to the largest markets (US & China - or maybe Europe), and aren't other forms of oil more costly to refine?  Shouldn't this make the actual oil itself cheaper than WTI?  I would think WTI is ridiculously low for no other reason is being stored and there are massive supplies of it somewhere, while the oil companies recognize they can make their nice profits on higher priced oil from elsewhere, which will make holdings of WTI much more valuable as it is shipped.

3.  I see no obvious reason for the price of either to be so high, except for the Fed, and if we accept that the Fed's behavior will come to a bad end, then the inflationary pressures on oil will, at some future point, reverse dramatically.  Meaning these trades are just trades, and not really a good long term value.  Not that anything is a good long term value aside from gold at this point.  But then again, perhaps I should purchase a few barrels of WTI, and store them in my backyard.  Better yet, I'll fill some barrels with gas from a local station and store that.  The "Always Sunny" option could be in play...


Sorry if anyone thinks this is a waste of their time.  I know the boards can be snarky - just trying to learn here.  I like Bruce's posts, usually, and this one caught my eye because I had been wondering about this same question over the last few weeks as I noticed WTI dropping in price and couldn't figure out why.

Kayman's picture

Inspector Bird

"I'll fill some barrels with gas from a local station and store that."

Assuming you are not speaking "tongue-in-cheek" don't even try to store gasoline.  It has a very short shelf life- even refiners won't hold it very long.

Inspector Bird's picture

You'll note I mentioned "Always Sunny" - "Always Sunny in Philadelphia" that is - a sitcom.  Very tongue in cheek.  There is an episode in which the characters "arbitrage" gasoline by storing it to take advantage of price increases.  Very funny.

whstlblwr's picture


From Wikipedia, In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate is low. It raises a dilemma for economic policy since actions designed to lower inflation may worsen economic growth and vice versa.

Further on Wiki: Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply,[8] and the government can cause stagnation by excessive regulation of goods markets and labor markets,[9] Either of these factors can cause stagflation. Excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.[10]

Do not follow markets, yet you notice WTI drop in price? snark

Inspector Bird's picture

This answers nothing.  Stagflation is a purely monetary condition, which I commented on.  So you've not answered the questions I asked. 

Furthermore, I said I don't follow oil.  I erred when I said I don't follow the markets - I meant OIL markets.  One doesn't have to follow a particular market to notice a price divergence.  One has only to take a look at oil prices (if you follow markets, you follow lots of different prices - not necessarily the niches themselves.  I've never traded oil, never intend to, but pay attention to the prices because of their impact in a macro sense) as part of a big picture.

Flakmeister's picture

1) Buy PBT instead of storing oil in the back yard.

2) Read up on the Export Land Model

3) Understand this figure  (you may have to scroll down a bit)

4) Understand that the US is no longer the driving force in world oil demand....

Inspector Bird's picture

LOL.  The fact people take my "store oil in the backyard" comment seriously makes me wonder about who, exactly, posts here and whether they really know what they are talking about.  Or if they just read too quickly and lack any kind of guile while reading that fast.  If I saw someone say that - I'd do a double take and realize it's a joke.

As for the oil drum graph, all that does is increase my questions about WTI versus Brent pricing as a factor of overall costs.  Shipping to Chindia is considerably more. 

I believe my comment mentioned the US as a demand factor - but not the driving force.  That part I understand.  But, referring to my comment above, the costs of shipping would lead me to believe Brent should still be cheaper, regardless of who the "driving force" is.


thanks for The Export Land Model.  I'd never seen this before - but this is hardly counter intuitive, though it is described as such.  From the standpoint of oil pricing, it would support my view that WTI should be more expensive.  So I'm still struggling for that answer.

Flakmeister's picture

Shipping to Chindia from the ME is not more than to here... Brent is the benchmark, not the actual oil.

Yes you comment on the back yard was taken toungue in cheek.... but most people are not aware of PBT.

DaveyJones's picture

...or anything else

producers rising internal demand, 5% production decline, EROEI below 10 to 1 and dropping, and a rising third world demand that knows nothing of price history and is out buying $2,000 cars    

surfersd's picture

There is np conspiracy this is a function of the huge amount of new production coming on line in the mid con. When Keystone is built the spread will collapse and WTI I will rally. Players are using every means that they can to move barrels to the gulf, trucking, rail you name it, to take advantage of the arb.

The thing to watch is the contango coming out of WTI as these barrels move out. The explanation of quality is not the case the difference in API would only explain about 50 cents of the price difference. 

Any more questions free to help. Spent my life doing playing this energy market.



Kayman's picture


Any more questions free to help.

Question: where do you see N.A. exploration over the next few years ?  I'm about to sign a few million contract with an oil services company, but have had the "so sue me" issues before.

Thanking you in advance


Flakmeister's picture

Keystone is built, you are referring to Keystone XL

Downtoolong's picture

I haven’t looked into the specifics of the enormous WTI/Brent spread for some time. As always, the devil is in the details. Ultimately it is driven by a huge logistics constraint at Cushing, which has and will continue to be manipulated whenever possible by those who control it. Even to load up a train you need access to transfer tanks. The biggest beneficiaries of the WTI discount relative to world oil prices are the refiners supplied with the cheaper crude (higher margins) and to a lesser extent their customers, who see some of the cost savings passed through in lower product prices.

The most significant aspect of this huge WTI/Brent spread existing for so long is simply that it proves the WTI futures contract is a completely worthless benchmark index for physical North American crude (I hope all the bozos who own the USO ETF are aware). Indeed, the WTI futures index has already been abandoned by some international oil exporters (including Saudi Arabia) as a pricing reference for their exports to the region. When was the last time you heard Maria Bartiromo or Rick Santelli mention anything about that while reporting on oil markets? And what has the CME done to reconcile this problem and come up with a better North American futures contract for the oil industry? Nada. And they won’t as long as their Wall Street masters continue to make those decisions and profit by trading circles around all the fund managers and speculators who are blindly willing to trade the paper WTI contract (or any index for that matter) as it is.  


LawsofPhysics's picture

Agree, but what would you say is the new benchmark for crude?  Good to know if one of your input costs are chemicals derived from oil (like mine).

Flakmeister's picture

Brent for tankerable LSC,  Argus Sour Crude Index for tankerable heavy sour....

Getting charts on Argus is a bitch....