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The oil price spread between WTI and Brent is tightening again.
What's "the spread?"...
It's the difference in price between what crude oil futures cost on the NYMEX in New York (the West Texas Intermediate rate) and the rate set in London (the Brent rate).
As of this morning, this spread stood at 7.2% of the WTI rate (the more accurate way to register its impact in the U.S. market).
It had been as low as 3.6% earlier this month, after hitting double-digit levels for most of 2013, when in some cases the spread jumped to more than 20%.
Both of these represent oil that is sweeter (with less sulfur content) than 80% of the oil that is traded internationally on a daily basis.
These futures contracts are the principal "paper barrel" benchmarks against which the prices of the "wet barrels" (actual consignments of oil) are determined.
As this oil price spread continues to narrow, it promises to create some direct consequences for investors.
Let me explain why this situation has suddenly changed...
Oil Price Spread: The Battle Between WTI and Brent
Of course, it wasn't always this way. Before August 2010, WTI would actually cost more than Brent since it was a better quality of crude.
But there were two things that changed this long-time relationship.
The first was that Brent became far more used as a benchmark in most regions of the world. The second was the growing situation at Cushing, Okla.
Cushing is where the daily oil price for WTI is pegged. It is the single largest confluence of crude oil pipelines in the country. That presented a problem: There was consistent inability to move volume out of Cushing, creating a giant glut.
In turn, that glut depressed the price of WTI even more.
As a result, Brent priced at a premium to WTI for each daily session since August 16, 2010, except one.
Therefore, "the spread" for the past 40 months has favored Brent, and that has led to some rather direct consequences, such as the following:
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
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