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As the market price for crude oil again flirts with $50 a barrel in New York and $53 in London, there's a much more important oil price bellwether that's being ignored.
It's crucial to predicting where oil prices are headed.
Whenever this number is high, oil prices tend to surge.
And it's not been this high in two years…
Why Brent Trades Higher Than WTI
I'm talking about the spread between WTI and Brent, which is once again expanding.
WTI is West Texas Intermediate, the benchmark crude rate for futures contracts in New York.
Brent is the crude rate set daily in London. Both are denominated in dollars, the currency for the vast majority of international oil trades.
Brent is often used as a gauge of international oil prices, while WTI is used to measure U.S. prices.
But both benchmarks consist of better quality oil than well over 70% of the crude traded globally on any given day. That means most consignments are priced at discount to one or the other of the bellwether rates.
WTI is slightly sweeter (i.e., has a lower sulfur content) than Brent. That should make it slightly more valuable.
Yet, except for a few trading days since mid-August 2010 (most during the lowest ebb in the oil pricing collapse), that has not been the case.
The price of Brent has consistently been higher than that for WTI. The reasons are twofold.
First, Brent is used more frequently for oil trades worldwide than WTI. This has an impact on something called the crude "strip," a snapshot of multi-month forward pricing.
The strip will tell you at any time during the trading day what the average price is for multiple months.
The strip consistently favors Brent over WTI as the barometer for trade. A new benchmark – the Argus Sour Crude Rate – has been introduced that more accurately reflects the quality of the international oil being traded.
Even the Saudis are now using it. But Brent remains the more widely used yardstick.
Now some of this follows from the central location of London in worldwide energy pricing and project finance.
Despite Its Higher Quality, U.S. Oil Trades at a Discount
The decision by the UK to leave the EU (Brexit) may begin eroding that preferential position, given that much of it flows from London being a ready conduit for transactions with the continent and beyond.
Yet for now, Brent remains preferred.
Second, U.S. prices have been influenced by two primary domestic American market considerations, each restraining prices.
Initially (roughly from the third quarter of 2010 through late 2015), pipeline bottlenecks had put a lid on significant pricing increases. A glut of oil in storage resulted.
This was particularly noticeable at Cushing, Okla.
This is the location of the largest crude oil pipeline confluence in the United States and the place where the daily WTI price is set. Subsequent opening of pipelines (both direct and operating in reverse mode) has improved the flow from Cushing south to the petrochemical complexes on the Gulf Coast.
In addition, there's the rise in overall U.S. production, primarily as a result of growing unconventional (shale and tight) oil extraction. Once again, the concern has been an oil surplus, providing another dampening on local prices.
Much of the angst expressed over excess U.S. production has been overdone for reasons I have often discussed in Oil & Energy Investor. The goal is obviously a balance between supply and demand, a condition that will result in a more accurate price.
Here's What the Oil Balance Is Really About
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.