As FT Alphaville has been reporting for weeks now, WTI has lost is losing its position as the global oil-price benchmark.
In case anyone still disputes the fact, Thursday’s WTI/Brent spread has reached a preposterous $9 dollars. As the FT’s trusty energy correspondent Javier Blas informs us, that’s the widest spread in 17 years.
Meanwhile, the differential between WTI and other US grades is widening too. The Mars blend is trading $1.5 above WTI, which is amazing considering it is a medium-sour crude, while Light Louisiana Sweet was trading as much as $8.30 per barrel more than WTI. This follows another epic build at Cushing, Oklahoma – the physical delivery point for Nymex WTI. The facility is now holding a record 33m barrels, which means it only has about 1m barrels of capacity spare.
Until the Cushing scenario is resolved (unlikely until the contango in WTI disappears), the Nymex light sweet crude contract remains a pretty useless global price benchmark. Paul Horsnell, from Barclays Capital’s commodity research team agrees. In fact he puts it even more eloquently (our emphasis):
The dynamics of the US crude oil market have become increasingly bizarre in recent weeks, and have now reached the point where the US crude oil price mechanism itself has got stuck in a fairly vicious loop. The mechanics of the market, and the logistical compromises that have had to be made to generate a market price along a pipeline system, are themselves creating additional distortions. Those distortions are, in turn, feeding back into ever greater stress on the market mechanism. That feedback is creating a wild thrashing about in the front end of the WTI curve, and an increasingly dislocated and disconnected set of time spreads.
As that effect has grown, in terms of being a reflection of general market conditions, WTI has become about as useful as a chocolate oven-glove. Please feel free to insert any other comparison of your choice with something that is perhaps not best fitted for the purpose. Most important, WTI is currently sending the signal that it is all but impossible to arbitrage across either time or region. Front month spreads of $7 per barrel (see Figure 18) and Brent-WTI spreads also of $7 per barrel (see Figure 15) are so far away from any sustainable equilibrium that they imply a mounting degree of market breakdown. This is not the first time this has happened with WTI; it is, however, the most severe instance.
The view from JBC Energy meanwhile is:
Such a wide spread is making it much more difficult to import foreign Brent-related grades such as Russian Urals and West African Bonny Light. With so much crude stored in landlocked Cushing and not enough pipeline infrastructure to redistribute it, WTI Cushing has once again become dislocated from other US grades .
So there you have it, WTI is broken and, in our opinion, irrelevant as a true indicator of the global oil price. Can the oil price is falling scare-stories please stop now? At the last look Brent was trading at $47 per barrel.
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Related links:
It’s all about Cushing – FT Alphaville
Rollover, rollver, WTI - FT Alphaville