If you has only a passing interest in oil prices, it was not hard to notice the gaping price disparity between the two most widely quoted indexes, the current month Brent crude futures versus WTI (West Texas Intermediate), In the days prior to contract expiration in December, WTI traded as much as $9 below Brent. Right now, with January expiration near, the disparity is a flat $10, with Brent at $46.20 versus $36.20 for WTI.
That, of course, makes no sense. The culprit is limited storage in Cushing, Oklahoma. As Eugen Weinberg, a commodities specialist with Commerzbank, pointed out last May:
The West Texas Intermediate oil contract, based on delivery in Cushing, Oklahoma, is good for 300,000-400,000 barrels per day. The storage capacity in Cushing is about 20.5m barrels. The trading volume on which that is based is between 500m and 600m barrels per day. If you are going to manipulate the price, you would think about doing that in Cushing.
Now it may be that the oil glut is showing up even worse in Cushing than elsewhere because above ground storage is maxed out (even ships are full), or it may also be the evil specs. But the initial reaction among traders is to treat WTI warily.
From the Financial Times:
The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value not only against other global benchmarks, such as Brent, but also against other domestic US crudes.
Julius Walker, an oil market analyst at the International Energy Agency in Paris, said there was “anecdotal evidence” of traders moving away from WTI and “doing deals based on other US oil benchmarks”.
The IEA monthly report said Brent was now “arguably more reflective of global oil market sentiment”. However, Bob Levin, managing director of market research at Nymex said that the WTI contract was performing “transparently”, reflecting a “loss in oil demand and sharply rising inventories”.
“WTI is better reflecting global oil fundamentals than Brent,” Mr Levin said. “The oil industry has not abandoned the WTI contract and it has confidence in it.”
Nevertheless, traders in London, New York and Houston confirmed a small number of transactions away from WTI after its price plunged last week to record discounts against other global and domestic benchmarks. The traders cautioned that the move could reverse if the WTI situation normalised. Lawrence Eagles, at JPMorgan, said any move away from WTI would face “strong resistance as none of the other US benchmarks have the price transparency of an exchange market”.
Highlighting the price disconnection with the global market, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, last week plunged to an all-time discount of $11.73. The detachment hit the US market too, where Light Louisiana Sweet, jumped to a $9.50 premium, the highest in 18 years.