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Guest Post: Explaining The WTI-Brent Spread Divergence

Tyler Durden's picture





 

Submitted by John Aziz of Azizonomics,

Something totally bizarre has happened in the last three years. Oil in America has become much, much cheaper than oil in Europe. Oil in America is now almost $30 cheaper than oil in Europe.

This graph is the elephant in the room:

3 year brent spread

And this graph shows how truly historic a move this has been:

brent-WTI-spread

Why?

The ostensible reason for this is oversupply in America. That’s right — American oil companies have supposedly been producing much, much more than they can sell:

This is hilarious if prices weren`t so damn high, but despite a robust export market for finished products, crude oil is backing up all the way to Cushing, Oklahoma, and is only going to get worse in 2013.

Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage.

But there’s something fishy about this explanation. I don’t know for sure about the underlying causality — and it is not impossible that the oil companies are acting incompetently — but are we really supposed to believe that today’s oil conglomerates in America are so bad at managing their supply chain that they will oversupply the market to such an extent that oil sells at a 25% discount on the price in Europe? Even at an expanded capacity, is it really so hard for oil producers to shut down the pipeline, and clear inventories until the price rises so that they are at least not haemorrhaging such a huge chunk of potential profit on every barrel of oil they are selling? I mean, that’s what corporations do (or at least, what they’re supposed to do) — they manage the supply chain to maximise profit.

To me, this huge disparity seems like funny business. What could possibly be making US oil producers behave so ridiculously, massively non-competitively?

The answer could be government intervention. Let’s not forget that the National Resource Defence Preparedness Order gives the President and the Department of Homeland Security the authority to:

(c)  be prepared, in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements;

(d)  improve the efficiency and responsiveness of the domestic industrial base to support national defense requirements; and

(e)  foster cooperation between the defense and commercial sectors for research and development and for acquisition of materials, services, components, and equipment to enhance industrial base efficiency and responsiveness.

And the ability to:

(e)  The Secretary of each resource department, when necessary, shall make the finding required under section 101(b) of the Act, 50 U.S.C. App. 2071(b).  This finding shall be submitted for the President’s approval through the Assistant to the President and National Security Advisor and the Assistant to the President for Homeland Security and Counterterrorism.  Upon such approval, the Secretary of the resource department that made the finding may use the authority of section 101(a) of the Act, 50 U.S.C. App. 2071(a), to control the general distribution of any material (including applicable services) in the civilian market.

My intuition is that it is possible that oil companies may have been advised (or ordered) under the NDRP (or under the 1950 Defense Production Act) to keep some slack in the supply chain in case of a war, or other national or global emergency. This would provide a capacity buffer in addition to the Strategic Petroleum Reserve.

If that’s the case, the question we need to ask is what does the US government know that other governments don’t? Is this just a prudent measure to reduce the danger of a resource or energy shock, or does the US government have some specific information of a specific threat?

The other possible explanation, of course, is ridiculous incompetence on the part of US oil producers. Which, I suppose, is almost believable in the wake of Deepwater Horizon…

 

 


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Wed, 02/13/2013 - 16:59 | Link to Comment ziggy59
ziggy59's picture

So, The oil market is broken too?

Wed, 02/13/2013 - 17:01 | Link to Comment Spider
Spider's picture

May just be anti-inflationary oil price manipulation to keep the price of oil cheaper via derivatives.  Thus keeping inflation at bay for a while - but you cant do it to the worldwide market so the focus is just on the US market - but my guess is no better than yours...

Wed, 02/13/2013 - 17:06 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

How about: oil and gas is one of the few markets that still attracts capital in this stupid ZIRP environment. Because it's the most fundamental building block of the North American economy, and besides food it's right at the bottom of the Hierarchy of Needs. There's a shit-ton of money that needs to get put to work, the stock market is at all-time highs, and the gold market has a fucking boot on its neck. Where else you gonna go?

Wed, 02/13/2013 - 17:08 | Link to Comment Dear Infinity
Dear Infinity's picture

Look at this post from back in June: http://comparesilverprices.com/metals/death-of-purchasing-power-usa-gas-... the graphic is telling -- this is pure DEATH of purchasing power, being lauded as a normal market dislocation, but the truth is much more insidious.  

Wed, 02/13/2013 - 17:22 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Indeed, I'll only add that isn't there still quite a bit of oil under American Soil?  Yes I realize that internation companies must go get it, but someone still has to sell them the lease or allow access. How much oil under that sovereign E.U.soil again?

Wed, 02/13/2013 - 17:24 | Link to Comment EscapeKey
EscapeKey's picture

Oil trading is so manipulated it's commonly referred to as "the asylum".

Wed, 02/13/2013 - 17:49 | Link to Comment imapopulistnow
imapopulistnow's picture

This conspiracy post is absurd. 

Why is WTI priced below international? 

Because someone figured out how to pump oil out of tight sands in North Dakota and Texas, resulting in 1.3 million barrels a day more than thought possible just 3 years ago - and growing at a rate of nearly 1mbd additional each year.

Because it takes multiple years to add new pipelines due to environmental studies, NIMBY law suits, permit delays, eminent domain proceedings and construction times.

Because pipelines are further delayed by politics.

Because railroads are hestitant to load up with too many tank cars knowing that lower cost pipelines will eventually be built.

Author needs to give this one up.  Go back to your grassy knoll/truther/birther theories.

Wed, 02/13/2013 - 17:58 | Link to Comment imapopulistnow
imapopulistnow's picture

I'll add, if this conspiracy theory is true, then Canada must be "all in" as their oil sells for $26 a barrel less than WTI.

http://www.cmegroup.com/trading/energy/crude-oil/western-canadian-select...

Nice compliant and docile folks those Canukers...

Truth is the pipelines that they planned to ship their oil south are either loaded with North Dakota crude or delayed by 4 years and likely will never be built (Keystone)

Wed, 02/13/2013 - 18:10 | Link to Comment imapopulistnow
imapopulistnow's picture

Similarly, the energy sources that will renew the industrial base (Allah and Obama willing) are natural gas and natural gas liquids.  Once again, the technology of extraction changed so rapidly that the stuff is being over-produced. 

Recall 5 years ago, the big oils were seeking permits for LNG import terminals due to an NG shortage.  Today they are seeking permits to convert these facilities into LNG export terminals - a process that takes about 10 years to accomplish.

But the excellent news is that the USA will be a low-cost producer of NG/NGLs for decades and those industries that rely on NG/NGL either as a feedstock and or energy source will re-shore and flourish.  Think plastics, fertilizer, iron and steel, metal forming and refining.  Heck even bakers benefits (just not enough to save the Twinkee though)

Wed, 02/13/2013 - 21:11 | Link to Comment Matt
Matt's picture

Very little oil is actually WTI anymore. It is an index.

The low-grade oil that comes from Bakken and Tar Sands are discounted because they are lower quality.

Canadian Tar Sands are discounted further due to some wierd rules in NAFTA.

Different oil needs different refineries. Obama blocked a big part of Keystone XL, which is having it's route moved away from a bunch of sandy, erosion-sensitive land over top of a large aquifer.

This is a big part of the backlog. Also, demand may be collapsing due to the fact that, contrary to what they say, there is no recovery. Unemloyed people don't need to drive as much. Less shipping and freight means less fuel burning.

Why are the oil companies producing if there is such a congestion? I bet similarly to shale gas, they are producing on credit and need cash flow to service their debt.

Also, Brent is likely higher due to actual issues involving acquiring Brent, refining, etc. That is to sya, this is not just an issue of cheap WTI, but also of expensive Brent.

Thu, 02/14/2013 - 12:01 | Link to Comment Just Ice
Just Ice's picture

Bakken oil is primo light sweet (excellent quality, not "low-grade" as implied by your post).  WTIC is not "cheap" at 97-98/bbl (where it's currently trading in front months).

Thu, 02/14/2013 - 19:55 | Link to Comment Matt
Matt's picture

So, you feel that the price spread between WTI and Brent is purely due to Brent being expensive?

You are correct, I  was wrong about the quality of Bakken oil, I was under the impression it was a lower grade, heavy oil. Thanks for the correction. 

Thu, 02/14/2013 - 23:55 | Link to Comment Just Ice
Just Ice's picture

I don't trade Brent so don't give much thought to it.  In general, geopolitical vagaries suggest a ~10-20 premium for Brent (high end of that range, obviously whenever traders are pounding the tension drums wrt threats of war in mideast...a tiresome yet unending meme through the years despite lack of serious supply disruptions during a myriad of conflicts in the area).  I would place "fair value" of Brent at 90-100/bbl and wtic @ 70-80/bbl.  While some marginal wells in the Bakken need 80-90/bbl crude to break even, the majority mint $ with it selling in 70's.  Saudi is fine with Brent at $90 (not because their cost of production requires that but rather their political promises to mollify the people do).  Recall in 2006, height of housing boom with things humming along here in US, wtic was trading in 60's.  Since then, production's increased and demand's plummetted.

Technically, some traders are looking at 90-100 range in wtic thus currently trading near top of range...others have 90/93 to 97/100 inside/outside range, same effect...others have market in a bull trend period so long as >95 and looking for continued upside.  Personally, I'm looking at this being top of range and an eventual break of range to downside to resume trend it was in before interrupted last summer, (Draghi's "big bazooka" promise that sent all risk-on trades bounding north).  I am currently short from mid-97's (Apr contract) and hopeful hourly chart morphs into a nice M-top here.

Thu, 02/14/2013 - 00:21 | Link to Comment Technical Difficulty
Technical Difficulty's picture

I'm fairly certain that the answer is because US oil companies need to meet revenue targets. Demand is flat or down, yet there is still expectations to increase revenue. The (short term) solution is to sell more barrels which get stockpiled, which influences the price, (although not as much as you think. Ever watch the market after inventories are released?) which causes them to have to sell more barrels, etc etc. CEO will be long gone by the time it's an issue. Inflation is on their side, however, and keeps the game going.

Wed, 02/13/2013 - 17:39 | Link to Comment beachdude
beachdude's picture

Bonzai, Ignore the boot on your neck or simply don't consider it as such, and use this as time on your side... an extended buying opportunity.

Wed, 02/13/2013 - 18:31 | Link to Comment max2205
max2205's picture

Tanker rates are so cheap...sell it to the EU!?

Remember when JPM had half the worlds oil supply on tankers floating around....guess they sold that huh.....

Wed, 02/13/2013 - 21:15 | Link to Comment Matt
Matt's picture

1. pipeline congestion

2. different refineries for different oil

Wed, 02/13/2013 - 17:04 | Link to Comment RockyRacoon
RockyRacoon's picture

(d)  improve the efficiency and responsiveness of the domestic industrial base ...

If they could do this, they woulda already done it.  Ergo: they can't.

Wed, 02/13/2013 - 17:07 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

WHAT "domestic industrial base"???

Wed, 02/13/2013 - 17:15 | Link to Comment Winston Churchill
Winston Churchill's picture

Crickets.

Wed, 02/13/2013 - 17:33 | Link to Comment DaveyJones
DaveyJones's picture

the ones wishing upon a star or the other ones?

Wed, 02/13/2013 - 17:51 | Link to Comment Poetic injustice
Poetic injustice's picture

Death Star construction project. Krugman is lobbying to approve it.

Thu, 02/14/2013 - 19:57 | Link to Comment Matt
Wed, 02/13/2013 - 17:27 | Link to Comment Encroaching Darkness
Encroaching Darkness's picture

The idea that a government composed of the likes of Menendez, Reid, Obama, Biden, Napolitano, Sibelius, Geithner, Holder et. al. being able to "improve" anything, anywhere, at all, is the reason it's all going to hell in a handbasket now.

The fact that legislation was written, passed and is being implemented based on such a laughable premise is proof that Satan has a sense of humor. You just have to look for it.

Wed, 02/13/2013 - 19:26 | Link to Comment nope-1004
nope-1004's picture

+1

Wed, 02/13/2013 - 17:08 | Link to Comment Tijuana Donkey Show
Tijuana Donkey Show's picture

No, it's always been "fixed." 

Wed, 02/13/2013 - 17:12 | Link to Comment Au_Ag_CuPbCu
Au_Ag_CuPbCu's picture

I really need to get off this centrally planned, manipulated planet!

Wed, 02/13/2013 - 17:22 | Link to Comment 11b40
11b40's picture

Maybe the better choice of words is corrupted instead of broken.  After all, it is the digital age.

Wed, 02/13/2013 - 18:49 | Link to Comment akarc
akarc's picture

Maybe not so much. I would have to look up the link from awhile back, but I seem to remember that the military is not so convinced that peak oil has not arrived.  Both the Navy (most especially the Navy) and the Air Force have put a great deal of energy (excuse the pun) into investigating alternative fuels.

Remember many fracked oil wells decline fairly rapidly and the cost of getting the oil that is there has increased.  Yeah we have a hell of a surplus at the moment. But then we are in a major global economic, recession, depression, whatever they want to call it now days.

What happens to all that backed up oil if all of a sudden, real growth kicks in. Yeah I know, prob not in my future, but still..............

Or maybe a war??? Oh no, were pulling out of Afghanistan and h ave learned our lesson.

 

Wed, 02/13/2013 - 16:59 | Link to Comment TwoHoot
TwoHoot's picture

Anyone that ignorant about the US oil business shouldn't be allowed to write about it.

Wed, 02/13/2013 - 17:01 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

Enlighten us please, then.

Wed, 02/13/2013 - 17:05 | Link to Comment RockyRacoon
RockyRacoon's picture

His daddy used to work at a service station, so he's a frickin' genius. 

Wed, 02/13/2013 - 19:19 | Link to Comment TwoHoot
TwoHoot's picture

Logistics and infrastructure.

Wed, 02/13/2013 - 17:57 | Link to Comment Vashta Nerada
Vashta Nerada's picture

The reason WTI is so much cheaper than Brent is because of logistics.  It is easier and cheaper to put Brent on the East Coast than WTI.  Thank you, Feds and EPA.

Wed, 02/13/2013 - 17:04 | Link to Comment Imminent Crucible
Imminent Crucible's picture

The US government might be forcing a stockpiling of oil because they're planning to involve us in a big war? Preposterous. This nation doesn't like wars, we even elected a Nobel Peace Price Winner to manage the four wars we had going during the election.

And let me say he's doing a hell of a job. Added a couple, even.

Aziz should be ashamed of himself. Never trust a guy whose name can be pronounced by opening a pop bottle slowly.

Wed, 02/13/2013 - 17:37 | Link to Comment DaveyJones
DaveyJones's picture

...and oil and war have never been connected

and the petrodollar is a hoax

and torture is designed (and proven) to bring out the truth

Wed, 02/13/2013 - 17:05 | Link to Comment theprofromdover
theprofromdover's picture

I thought Obammo said stockpile at Cushing and if the speculators start messiing around with the oil price (like they did in 08/09) dump it on the open market. There was no reason for a divergence in price between sweet Texas crude & Brent. Only good intervention he ever did.

 

Wed, 02/13/2013 - 20:00 | Link to Comment Janice
Janice's picture

Oh, I'd love a glazed donut right about now.

Wed, 02/13/2013 - 20:11 | Link to Comment falak pema
falak pema's picture

the spare nut! I think she deserves it! Where is Lance's canadian alias?

On WTI/Brent  spread we need the Flak to shyster this thread with his meistery.

Wed, 02/13/2013 - 17:05 | Link to Comment apberusdisvet
apberusdisvet's picture

The answer could be the onset of martial law; lots of gas needed to transport millions to the FEMA (extermination?) camps

Wed, 02/13/2013 - 20:38 | Link to Comment Ident 7777 economy
Ident 7777 economy's picture

 

 

 

FAT CHANCE Pilgrim; who is going to provide the entertainment, sow the seeds for wheat production, plow the G D roads when it snows for TPTB ...

 

THAT'S the big problem with STUPID conspiracy theories like that - too many functions (think PLUMBING and who OPERATES THE SEWAGE PLANT) are performed by the AVERAGE PERSON who would also end up in your fantasy FEMA camp ... and TPTB would have to do their own PLUMBING and SEWAGE PLANT operating.

 

CLEARLY, you have not thought this through.

 

 

 

 

 

 

Wed, 02/13/2013 - 20:58 | Link to Comment tickhound
tickhound's picture

In one of my doomer thought experiments they let the really really good little bitches do the sewage work.

Wed, 02/13/2013 - 17:05 | Link to Comment semperfi
semperfi's picture

Why? A: because our guys in the U.S. are better at manipulation, deception, price-rigging, price-controls, etc - you know, corruption !

Wed, 02/13/2013 - 17:06 | Link to Comment pcrs
pcrs's picture

if they are not selling it for more in the foreign markets, they must be banned from doing so or heavily taxed.

Wed, 02/13/2013 - 17:08 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

And yet, gasoline is at all time highs. 

Wed, 02/13/2013 - 17:51 | Link to Comment Hubbs
Hubbs's picture

Gas at all time highs for this time of year which in theory would contribute to increase cost of doing business and therefore putting a damper on business expansion...but but but I thought government was trying to stimulate business. So is the fear of inadequate petrol to run the military machines now greater than the fear of driving up business costs /worsening the recession?

Wed, 02/13/2013 - 17:11 | Link to Comment espirit
espirit's picture

...cause they can.

There, fixed it.

Wed, 02/13/2013 - 17:12 | Link to Comment caShOnlY
caShOnlY's picture

(d)  improve the efficiency and responsiveness of the domestic industrial base to support national defense requirements...

"improve the efficiency" .. ????

Oxy moron = Government and efficiency.  

The most uneffecient, wasteful entity on the planet is going to govern effeciency in the private sector?  fUkmE. 

 

Wed, 02/13/2013 - 17:14 | Link to Comment Canadian Dirtlump
Canadian Dirtlump's picture

I can tell you that being a business manager of a pipeline company, the oil companies here have all been told by the department of doo doo to keep a bunch of shut in production for the advent of an as yet unnamed cataclysm. I would think that companies in the US havebeen told the same.

 

Translation - prices are still so high that everyone has massive programs going. Short of a price crash (which in theory COULD happen but is as likely as me growing a 4th ball) it ain't gonna stop.

Wed, 02/13/2013 - 17:17 | Link to Comment Winston Churchill
Winston Churchill's picture

You have three ?

Wed, 02/13/2013 - 17:49 | Link to Comment Bohm Squad
Bohm Squad's picture

...Canadian healthcare. 

Wed, 02/13/2013 - 18:16 | Link to Comment Canadian Dirtlump
Canadian Dirtlump's picture

to be honest, I won the third ball in a bet against lance armstrong.

Wed, 02/13/2013 - 17:23 | Link to Comment odatruf
odatruf's picture

It's not true in the US, and I seriously doubt it is true in Canada.

Wed, 02/13/2013 - 17:25 | Link to Comment Canadian Dirtlump
Canadian Dirtlump's picture

It isn't true here and it isn't true there and yes, I have 3 balls, it is a long story.

Wed, 02/13/2013 - 17:28 | Link to Comment Jack Sheet
Jack Sheet's picture

The play is as old as the hills - and specially the diamond trade - REMOVE THE SUPPLY (real or apparent) to control the price

Wed, 02/13/2013 - 17:33 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Oil is a lot different from diamonds.

We don't rely on diamonds to maintain our way of life, and diamonds are not in short supply - oil is.

Thu, 02/14/2013 - 19:59 | Link to Comment Matt
Matt's picture

Especially considering diamonds can be made synthetically with absolute purity at lower cost than mining.

Wed, 02/13/2013 - 20:48 | Link to Comment jldpc
jldpc's picture

Please tell us the story on how you got a 3rd ball.

Wed, 02/13/2013 - 17:18 | Link to Comment beauxe
beauxe's picture

This is the MOST ill-informed analysis of the crude oil market I have ever read.  It is pure nonsense.  While it must be good for readership to inspire conspiracy thoeries,, the boring truth is government is in the way by virtue of disasterous permitting policy for the construction of pipelines and other infrastructure that would support a robest local demand supporting refined product exports that service the rest of global demand.  Mr. Aziz:  If this is any measure of your ability or accumen then you should close up shop.  Don't be lazy.  It is embarrasing to watch for all of us.

Wed, 02/13/2013 - 17:33 | Link to Comment SmallerGovNow2
SmallerGovNow2's picture

Please provide us with your side of the story, inquiring minds want to know...

Wed, 02/13/2013 - 18:40 | Link to Comment bidaskspread
bidaskspread's picture

Take a look at the GSCI weightings, and follow the banksters.

S/P GSCI weighting 2008 - May 23, 2008 WTI -40.73%, Brent - 14.73%. S/P GSCI weighting Nov. 5 2012 WTI - 24.71%, Brent 22.34.%. I see WTI cut in half and Brent doubled, please multiply by QE's.

Libya, African supply issues, and the old water born bbl vs. land locked bbl.

Full Brent Panamax's were falling off the edge of the earth due to it being flat.

All better explanations then the government conspiracy theory.

 

Wed, 02/13/2013 - 20:24 | Link to Comment Teamtc321
Teamtc321's picture

I fully agree. Also a current link below for viewing if interested.

 

http://us.spindices.com/performance-overview/commodities/sp-gsci?indexId...

Wed, 02/13/2013 - 17:46 | Link to Comment tarsubil
tarsubil's picture

So is your argument that a lack of refinery capacity reduces local demand for crude (hence crude stays lower but refined stays the same due to a government induced bottleneck)?

Wed, 02/13/2013 - 17:19 | Link to Comment LukeWorm
LukeWorm's picture

Why do you assume that the US price is wrong?

Wed, 02/13/2013 - 17:20 | Link to Comment Jack Sheet
Jack Sheet's picture

Are you an alias of EconMatters?

Wed, 02/13/2013 - 17:39 | Link to Comment madcuban
madcuban's picture

It would seem so. But am i wrong or did he then just quote himself too. Something is up. 3 Brent-Wti stories in 24 hours. Each one worse than the previous.

Wed, 02/13/2013 - 17:25 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I wish I could believe in Dow theory. I wish I could justify various price movements.  But the fact is the economy is controlled by for profit private banks that include JP Morgan and the Federal Reserve, and prices are set upon shorting some indeces and buying others.

Europe is not as relient on gas as North America is.  When the price rises there, because they are already used to a higher price and because of their infrastructure (that has high speed trains leading everywhere) they don't feel the porice pinch.  In North America, the cities and their suburbs make it impossible to get even a few blocks without a car.  Buying groceries is not done by one's work, it is a seperate chore all together. 

Since we know that paper silver and gold prices have been repressed (and thank you by the way, Dr Bernanke) then why not oil?  With that, demand has been lessoning in North America and this might cap price spiking too, but if that is the case in Europe (which is also mired in depression) then prices should have fallen there too.  Combine that with the strong euro, and nothing correlates.  So we are back to the prices being manipulated by corporate controlled governments.

Wed, 02/13/2013 - 17:24 | Link to Comment LawsofPhysics
LawsofPhysics's picture

If people think that oil prices are high with government intervention/subsidies/tax breaks, just wait until the government folds...

Wed, 02/13/2013 - 17:24 | Link to Comment Albertarocks
Albertarocks's picture

The Japanese gov't has ordered refineries in that country to cut production by 20% as per this earlier post here on ZH. 

http://www.zerohedge.com/news/2013-02-13/japan-reflation-deathwish-leads...

 

How bizarre is that?  Sure, Abe has openly declared that "we want inflation so bad we can taste it".  But at the cost of deliberately raping the Japanese people at the pumps?  Surely the move to cut production in Japan is connected somehow to the global manipulation of the oil markets that is obviously gaining steam.  John Aziz thinks "there's something fishy about this explanation"?  You'd better believe there's something fishy about it.  Good call John.  I imagine we're going to find out soon enough what the real reason is.  Most likely it starts with the letter BOOM.

Wed, 02/13/2013 - 17:30 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The real reason is the world is mired in a deflation of a housing and commercial real estate market, high unemployment, and this is cratering demand for unneccessary goods.

So economists, in their infinate wisdom, have decided the only way out is to issue debt (backed by nothing other than the good faith and credit of the corporate controlled governments).  The debt issuence then creates inflation.  Oh, but that is now not nearly enough!  No!  Now we need to take supply off the rails because demand is that weak!

We are at an apex.  Who knows when it goes boom, but history will look back on it as an epic event, and when read in a book, it will be done in the blink of an eye.

Wed, 02/13/2013 - 19:54 | Link to Comment Ham-bone
Ham-bone's picture

Definitely something strange here -

US (N. American) demand for crude and refined gas have dropped by about 12% since peaking in '07 while demand is rising in Asia (x Japan), third world...US demand is back to '02 levels and still falling "only" using about 18million b/d vs. expectations (trendline) usage of 22m/b/d.

WTI has diverged by up to $25 from Brent starting as US demand started waning in '06

Record high and sustained high prices have made drilling profitable in previously money losing ventures...likely some linkage to money printing coupled w/ collapsed US demand but somewhat offset by lack of US refining capacity and US differing fuel standards creating CA "only", winter blends, etc. refined fuels that cannot be shared w/ other states...massively inefficent.

So, US demand collapses but N. American production spikes as oil prices recover quickly from crash and remain high (production of crude primarily in central US is not in line w/ US population centers primarily on coasts)

If Canadian, US midwest production can be moved effectively to export centers, the oil will join the global pool and potentially drive down Brent prices by $3 to $5 while popping WTI to equilibrium w/ Brent???  Thus good deal for N. American oil exporters but bad deal for those consumers in US and Canada currently paying well below market prices and not really much help for E / W coast US consumers...same is even more true for N. Gas!

So, how hard is it to believe US policy has dissuaded proposals for infrastructure plays (N. Gas, Crude) to move to an export based model rather than previoius import model...instead loading the oil on Warrens train plays that he purchased almost like he knew something (imagine how those RR's would be doing absent all that oil?).

There is something fishy and very important here (as there is in the T market, equity market, libor, PM's, GSE's, housing, student loans, etc. etc.)

All these strange occurances have taken place generally since the new administration took over (not that previous crap red/blue team politicians didn't try)...I didn't use to believe one president or another really mattered but now I surmise the present admin came in w/ FDR like intervention intentions and once you start, there is no looking back regarding centralized planning.  I believe this admin saw the problems facing it and has become involved in every facet of our economy but will take some time to fully understand the implications accross the board.

Wed, 02/13/2013 - 19:03 | Link to Comment chump666
chump666's picture

Could be oil rationing. It is utterly amusing that the Iran thing, which was always a non issue as the country is f*cking joke (fake jet planes and fake space flights etc), took center stage all the while Japan/China are moving closer to a conflict.   We have war footing that so far as shown a nuclear threat (North Korea), Japanese fighters scrambled every month, Chinese patrol boats lock and loading on Japanese destroyers.  This is the real deal, Japan has one of the most sophisticated navy's and air-force in the world.

Abe is preparing for war, from here he could issue war bonds to the Japanese pension funds (now very cashed up) and public. 

Wed, 02/13/2013 - 17:29 | Link to Comment Catflappo
Catflappo's picture

I suppose the Natural Gas market is rigged too?   After all, the price in Europe is 5-10x that in the USA.

Actually cigarette markets are rigged too.  A lot cheaper in Eastern Europe.

Oh, and how come I can buy clothing in Asia a lot cheaper than here?

Yes, the list goes on and on...

Wed, 02/13/2013 - 17:39 | Link to Comment armagediontimes
armagediontimes's picture

Oil in America is not "almost $30 cheaper than oil in Europe" So, given the central premis is wrong what is the point of this article?

Wed, 02/13/2013 - 17:42 | Link to Comment caShOnlY
caShOnlY's picture

".... Gentlemen: we agree to stop the pipeline from Canada and you agree to keep WTI under $100.  Do we have a deal then?"

Wed, 02/13/2013 - 17:43 | Link to Comment CEOoftheSOFA
CEOoftheSOFA's picture

Aziz sounds like he thinks the US oil industry speaks with one voice and coordinates with one another as if they were a cartel.  This is a usual situation where the production of commoodities is involved.  There is just a time lag in getting more of the the Cushing oil to an international port.   

Wed, 02/13/2013 - 17:51 | Link to Comment tarsubil
tarsubil's picture

From what I can see, Brent has been over 105 for 6 months. How long is the time lag?

Wed, 02/13/2013 - 17:45 | Link to Comment FunkyOldGeezer
FunkyOldGeezer's picture

More taxes levied on Europe oil production too?

Wed, 02/13/2013 - 17:52 | Link to Comment d_taco
d_taco's picture

Oil is the only market that is ruled by suply and demand.

The brent future market is based on a small marked.

Brent oil futures has a cash setlement.

If the Saudies manage to push the price up 10 dollars the make an extra 630 Milj a week.

The world is so desperate for oil that the price jumped 3 % at second christmas day.

Oil prices are riged and will collapse!

Wed, 02/13/2013 - 18:05 | Link to Comment lance_manion
lance_manion's picture

This author has not made any comment or statement concerning the other various crudes that are sold and used by NA refinery base, including but not limited to Bakken shale, WCS, ANS, Lloyd Blend, Mayan, etc.  WCS for example is currently trading at discount to WTI of some $24, or ~$71/bbl.  These heavy Canadian crudes are becoming more popular due to the abundant supply and large crack spreads generated.  Anyone left running Brent/ANS/LLS type crudes is in many cases losing their shirt against competitors running the heavy, less costly domestic crude supplies.  This is exactly the reason why US East coast refineries have been struggling against Midwest refiners who can rail their low cost finished products into their back yard.  Similarly, Alon/Paramount in California just idled all their LA regional refineries for this same reason.  Their annual report shows they were losing money on every bbl ran through those units.

No conspiracy here, just an overabundance of less costly domestic light and heavy crudes.

Wed, 02/13/2013 - 18:12 | Link to Comment IamtheREALmario
IamtheREALmario's picture

Two obvious possibilities:

1. A destruction of middle eastern capacity as a result of war

2. The destruction of the dollar and petro dollar which would put the US at odds with the middle easter countries that own a shit-pot-ful of a currency that no longer exists, which they traded for their 2nd most precious resource and main value to the rest of the world.

Wed, 02/13/2013 - 18:46 | Link to Comment chump666
chump666's picture

Cheaper? 

Brent is a hedged trade, as opposed to WTI.  In fact the crowded trade occurs more so on the Brent than the WTI spread.  If anything, the oil inflation pricing is now coming in from the Brent price.  WTI will be more of a hedge on geopolitical, which 2013, if China and Japan set it off - will spike.

I don't think we are ever going to see deflation on the oil price again.

Wed, 02/13/2013 - 19:00 | Link to Comment Herdee
Herdee's picture

The world is literally swimming in oversupply of oil right now.American and Canadian Companies have been doing so much drilling in Western Canada that their production has no place to go.The reason being that there is no pipeline capacity to handle the huge volume that's coming.Any new pipelines are years away.Add in some new oil sands projects coming on stream.Add in North Dakota.Everything in North America is jammed up with no place to go.The U.S. is now self sufficient and its neighbour to the north has more oil than Saudi Arabia.Anybody who thinks we are running out of oil should go back to the lies given out during the Carter Administration.Sheeple actually believed that crap and thought we were running out.If nothing improves in North America consumption wise, in the next two years we could easily see 50 dollar oil.

Wed, 02/13/2013 - 19:48 | Link to Comment Nassim
Nassim's picture

I think it is just Warren Buffett making sure that his railways don't have much competition:

 

"Meet Oil Refiners' New Best Friend: Warren Buffett"

http://www.fool.com/investing/general/2013/02/04/meet-oil-refiners-new-b...

Wed, 02/13/2013 - 20:56 | Link to Comment SmittyinLA
SmittyinLA's picture

Who is going to build a new refinery on speculation for a transitory specific oil glut?  

Just the permitting alone has to take 10 years and millions in bribes, who knows what the spread will be in 2023? (lots more) and maybe less oil ie your new refinery can never open because the "spread" doesn't matter because there 150% more refining capacity than available oil. 

Wed, 02/13/2013 - 23:13 | Link to Comment TheLastMan
TheLastMan's picture

1.  restrictions on exportation of us crude

2.  the usual over/malinvestment of resources in the bakken

3. us oil imports declining due to domesitc production (?)  http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm

3.  baltic dry index sagging due to less us imports (?)

4. supply and demand

qed

Thu, 02/14/2013 - 03:19 | Link to Comment dunce
dunce's picture

Two of the largest producers of brent are OPEC and the Russians and they have no interest in a free market price for their oil. I could not say that we have a free market either but it may be rigged differently.

Thu, 02/14/2013 - 04:52 | Link to Comment supermaxedout
supermaxedout's picture

Do you rememeber the first oil price shock!

Older Europeans do. In the early 1970 the OPEC oil price cartel was formed. Saudi, Iran, Iraq were part of it. Oil prices went up out of a sudden in Europe.  It was told to he public, that the reason is, that Saudi, Iran and Iraq nationalized their oil industries and do want to have a bigger chunk from the cake. But these countries and other important producers in the Gulf region were under the direct control of US/UK. 

Shortly after the US Dollar lost more than 50% compared to the German Mark and other European countries. From 1 Dollar = 4 German Mark to 1.80 even 1.60 German Mark. Quitge a shock for the German economy. Skyrocketing oil prices and a curency appreciation making exports very, very difficult.   I guess this was a worldwide phenomen. At that time the US were also not dependend on imported oil, comparable what they achieved now by extracting tar sands and fracking. This receipe was very succesful or the US and they simply want to repeat it now.

So all it needs now is a threat that the oil and gas streams to Europe and China are endangered to be intererupted by a crisis in the middle east. Or a mayor price hike like the one triggered by OPEC in the early 1970ties. Then the world needs either US military assitance to secure the oil supply or the world has to pay much higher prices in US Dollar denominated oil. Which means all the newly printed US Dollars piling up in the shelves in Washington are then badly needed to pay for the higher oil prices. A devaluation of the US Dollar would do it, then the world can have as many Dollars it wants. 

The separation of the WTI and Brent prices is necesary to make it possible for the US economy to survive the planned oil price shock since it would not hit WTI prices in the same magnitude as the rest of the world. The US economy can not survive such a full oil price shock . Thats why it has to be shielded by WTI price difference. Its that simple.

Its a preparation for at least an economic war. But the other superpowers China, Russia, India are fighting back and do protect Iran with the nuclear weapons shield. Without eliminating Iran or blocking the seaways for the Iranian oil its not working at all.  Thats why Afghanistan is so important. This is the country the oil and gas pipelines to the biggest future consumers India and China have to be build. Without Afghanistan no control of the oil and gas flows. So it all comes down to AfPakIranIraq area. This is were its decided. Thats why there are so many US troops there were the sand is. Saudi is anyhow a pupet and an occupied country jut like, Bahrain and Quatar. 

Thu, 02/14/2013 - 07:24 | Link to Comment Brick
Brick's picture

  Some of the difference I believe is in the perverse incentives to lie about unproven reserves by oil companys to obtain cheaper licences. i.e the difference in cost of unproven reserve drilling licences in Europe is very different to that elsewhere, thus making reserves in Europe appear smaller than they are.
  The next clue is in drilling rig fleet utilization rates with the european fleet pretty much maxed out compared to other fleets. When you look at offshore platform rig utilization  (52% US and 97% in Europe) you must get the impression that supply in Europe is being limited by the availability of rigs.
  All this you would expect with the price difference, but the current size of the Brent market means it is much easier to manipulate the futures market for Brent, which is helped by cheating with the unproven reserves. The real reason though is that until recently the US was rather lackadaisical about protecting the environment or protecting peoples rights. At some point in the future you might see the prices reverse as the oil companys current pull back from US oil development in favour of european development comes to fruition.

Thu, 02/14/2013 - 07:34 | Link to Comment AGoldhamster
AGoldhamster's picture

Sure as night comes after the day - this is just another liborgate.

The banks (in the same bed with government) manipulating the price of oil. Cheap oil for US - expensive oil for Europe. Difference is pocketed by the banks.

It's a myth that market makes the price - the rotten banks make the price. Period. Either you get that - or you still live behind the moon.

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