Friday, February 18, 2011

Brent-WTI spread

Colin Barr at Fortune Magazine has some interesting discussion of the WTI-Brent spread (this is the difference in prices between the basic spot price of West Texas blend oil in Cushing Oklahoma, and the price of the Brent contract in Europe).
So how do you get $4 gas when oil is just $85? The answer starts with some unprecedented behavior in global oil markets, where the benchmark European oil standard, known as Brent crude, is trading at a $20-a-barrel premium to the U.S. benchmark, the West Texas Intermediate futures contract that trades on Nymex. The two typically trade within a few dollars of one another.

Increased flows from Canadian tar sands and the Bakken shale fields in the northern Great Plains have sent oil flooding into Cushing, Okla., where the WTI crude contract is priced. But because pipelines are set to run into Cushing, not out, much of that oil is going into storage rather than into refineries. Oil stockpiles in Cushing hit their highest level in seven years last month.

The glut has disconnected the widely quoted WTI market from a sobering energy market reality. "Cushing isn't worth looking at," says Steve Kopits of energy forecaster Douglas Westwood in New York.
Running off the WTI glut could ease the pressure on Brent and Louisiana Light prices. But the glut isn't going anywhere any time soon.

Pipelines that take oil out of Cushing are at least two years away, and oil companies that stand to rake in fat refining profits aren't exactly looking to rush that timeline.

Conoco (COP) chief Jim Mulva shot down talk about reversing a pipeline that feeds oil to Cushing from the Gulf Coast, saying, "We don't really think that's in our interest."

Meanwhile, the steep contango in the WTI futures curve – the condition in which the near months are cheaper than future ones – creates incentives to add to the Cushing glut.

A refiner or trader with storage rights can buy the March future today, take delivery when it expires, sell the April contract -- and lock in an easy $1.75 a barrel in practically risk-free profits, says Stephen Schork, who writes the Schork Report newsletter in Villanova, Pa.
Let's take a look at the data underlying this discussion.  First, here's the weekly spot prices for both WTI and Brent (from the EIA).

To make it easier to see what's going on, let's take the spread between the two, and plot that:

As you can see, the amount of spread is unprecedented.  It's also very recent - the spread was $2.20 as recently as the first week of January, this year.  That makes me a bit wary of explanations based on long-term factors like the growth in Bakken oil, tar-sands production, or lack of pipelines out of Cushing - why would the market have been suddenly surprised in the last few weeks?

I don't have a better theory though.


Kamil said...

Let me quote a comment from
As an oil trader myself, I can say with reasonable certainty that the Middle East situation has little to do the with the current price of ICE Brent Crude oil, and more to do with manufacturing revival/recovery (especially in Germany) with accelerating declines in Brent Oil Production, coupled with a temporary overhang in supply in WTI NYMEX oil (note: production of WTI oil from Mexico is falling faster than predicted, so the price spreads should with time eventually decrease, as WTI rises inline with Brent Oil).

Putting the increase in price divergence just down to the Middle East is frankly wishful thinking, as the trend in the spreads were growing well before the recent Middle East troubles had even started, and the trend line accept for a full ‘bumps’ along the way, as remained largely intact.

Mr. Sunshine said...

Interesting. Gregor Macdonald's recent posts add up: and ... recovery outside the US driving oil prices while falling domestic US consumption as evidenced by building inventory here reveals the real economy, as opposed to the statistical recovery engineered by the Fed / Treasury / BLS?

tstreet said...

The post makes it sound like the oil goes to Cushing and dies there. It must go somewhere? Where does it go?

HalFiore said...

Ditto what Tom said. I read it a couple of times, and it still doesn't make sense. The oil must go out if there's a market there. Somebody's buying it at whatever the quoted price is, aren't they? They can't possibly haul it all out in trucks.

And I won't even ask why it's called West Texas Intermediate if it's coming from all over and going to Oklahoma...

Derwein said...

This topic is highly interesting. I have one question though. From your text it is evident that oil flows into Cushing both from Canada, Bakken and the Gulf Coast.

Given the comparatively low price of WTI one would expect sellers of oil would prefer to transport it elsewhere than Cushing in order to sell it. Maybe the Canadians and the Bakken operators do not have any other choice as to where to send their oil. However oil that at some time is available at the Gulf Coast must have other choices than being transported to Cushing. Why not load it on a ship and transport it elsewhere or why in the first place transport it to the Gulf Coast for further movement to Cushing.

Thus, although Conoco will not reverse the pipeline, why does anybody that owns oil available at the Gulf Coast choose to sell it into Cushing? Thus, even though oil cannot flow from Cushing to the Gulf Coast, why is it flowing from the Gulf Coast to Cushing since since this does not seem to make economic sense?

I find this issue very hard to understand, so please have patience if my question should be stupid.

Best regards and thanks for a very interesting blog!

Jan W

Derwein said...

Tom, Hal

An interesting question. I think the answer is that the oil does not leave Cushing at all. Well, at least not as crude oil.

It will be processed at refineries in the vincinity of Cushing and then leave the place as gas or distillate or whatever products.

Do not know if the products are pipelined or trucked away. If pipelined then probably in pipelines dedicated to the respective product.

At least I think that is the way it works. Mayby Stuart or someone else can correct me if that is wrong.

Dr. Blaine D. Pope: said...

I tend to agree with Derwein. Many things happening simultaneously, of course; but recent short-term context of turmoil in M.E., in tandem with long-term context of Peak Oil would likely cause planners of such things to want to "top it off," so to speak. They would want to max out storage capacity of WTI product, to ride out "potential storm" in energy market. What I didn't realize--until recently--was that this market could be so easily segmented (between Brent & WTI).

Recall: USA must now import 2/3 of its oil; therefore, relatively little would actually be "leaving" the country: USA Oil increasingly needed for USA domestic consumption (a growing trend & growing challenge among oil producers, worldwide!).

There's my own $85.15 on the issue.

Blaine D. Pope

clifman said...

According to RockyMtnGuy over at TOD, the spread is the result of an influx of oil that originates in the Canadian tar sands. and is currently landlocked, with no access to ports that might allow it to be sold in Asia, for example. But, again according to RMG, who seems to have some insight into the situation, 'stay tuned':

Mr. Sunshine said...

Gail Tverberg has a good piece on this today:

Stuart Staniford said...

Mr Sunshine - yeah, that is a good piece of Gail's - well worth reading for background.

clifman said...

Once again, from TOD's RMG:

TransCanada ramps up oil supply in new Cushing line

Monday, Feb. 07, 2011 - TransCanada Corp. has opened the spigots on a new pipe carrying Canadian oil to a major U.S. hub that’s already awash with supply.

The company has begun pouring oil into its Cushing Extension pipeline, a 591,000 barrel-per-day pipe that connects Steele City, Neb., with Cushing, Okla.

And there you go. In the last couple of weeks, another 591,000 bpd of new oil has started coming into a market that is already flooded with oil.

BOP said...

Also from TOD is this graph of the OECD vs ROW demand growth.

US demand is basically flat and the US market is oversupplied while emerging market demand is pushing up the the price of Brent. WTI best reflects internal US demand and Brent reflects demand outside the US.

porsena said...

TransCanada, operators of the new Keystone pipeline from Alberta into Cushing, said a couple of weeks ago that it was flowing 450,000 b/d.

TransCanada has been trying to get approval since 2008 for a pipeline, called Keystone XL, to carry this oil to the Gulf refineries. Keystone XL is tied up in the 'dirty fuel' debate that surrounds American use of product from the oil sands and the EIA drags on. I can't imagine the pricing pressures at Cushing in the meantime.