Tuesday, April 3, 2012
The graph above shows Brent (black) and WTI (blue) oil prices - both on the left scale. The green line is the spread between the two, and it is shown on the right scale which is shifted to allow us to see negative spreads.
The dynamics of Brent prices in the last year or two consist of the run-up associated with the Arab spring and in particular the actual loss of most of Libyan production in early 2011. Then there was a gradual erosion of prices due to increasing fears of a European financial implosion. The ECB's LTRO operations turned the picture from one of increasing near term risk of catastrophe to more of a gradual ongoing deterioration (still with the possibility of acute crisis episodes but further off in the future). That turned attention to fear of the effect of sanctions on Iran and/or an outright attack on Iran by Israel. Thus, since about the beginning of the year, Brent prices have been largely heading up. (I feel some pride that I stopped calling the price momentum as downward on Jan 11th and called it as upward on Feb 6th). With the US economy growing fairly well and global supply having at least momentarily paused the last couple of months...
...there seems room for Brent to go somewhat higher. Meanwhile, the discount of WTI to Brent grew in an unprecedented manner through most of 2011 I think this is best thought of as the result of the major drilling boom in the US as seen in oil rig counts from late 2009 onward:
The Brent-WTI spread fell in late 2011 as various pipeline responses were announced, but then has been growing again in recent months. With the rig count skyrocketing, and WTI over $100 to keep all those drillers motivated, I would hesitate to bet that the spread will be resolved in the near term.