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Friday, July 19, 2013

Brent and WTI Oil Futures: "The Spread is Dead"

by Calculated Risk on 7/19/2013 01:25:00 PM

From MarketWatch: WTI crude prices trade at premium to Brent

Prices for West Texas Intermediate crude oil on the New York Mercantile Exchange traded at a premium versus Brent crude prices on ICE futures Friday.

That was the first time WTI cost more than Brent crude since October 2010 ...

“Assuming our petroleum product consumption and exports remain at recent levels or more, then the spread is dead.” [said Richard Hastings, a macro strategist at Global Hunter Securities]
Brent Cushing Click on graph for larger image.

For the last few years there have been some capacity issues at Cushing (see Jim Hamilton's post Prices of gasoline and crude oil for a discussion of the issues).

As Hamilton noted:
[A]n increase in production in Canada and the central U.S. combined with a decrease in U.S. consumption has led to a surplus of oil in the central U.S. This overwhelmed existing infrastructure for cheap transportation of crude from Cushing to the coast, causing a big spread to develop between the prices of WTI and Brent.
The spread has been closing as more infrastructure has been put in place, US demand has increased, and global demand (Brent) has slowed. At one point Brent was selling for about 25% more than WTI (even though they are comparable quality). Right now the "spread is dead".