Comments on: My benchmark oil price is better than yours http://knowledgeproblem.com/2009/01/09/my-benchmark-is-better/ Commentary on Economics, Information and Human Action Fri, 01 Jun 2012 16:51:44 +0000 hourly 1 http://wordpress.com/ By: Craig Pirrong http://knowledgeproblem.com/2009/01/09/my-benchmark-is-better/#comment-6958 Fri, 09 Jan 2009 23:15:49 +0000 http://knowledgeproblem.com/?p=3810#comment-6958 Which is right? Chocolate or vanilla? The issue here is whether there is a “world price of oil.” There ain’t. Oil is not a homogeneous commodity due to differences in quality, transport costs, and geographic differences in supply and demand fundamentals (and shocks thereto.)

WTI is pricing US Midcontinent fundamentals. Brent is pricing more European/Middle Eastern/Asian fundamentals. Typically the US market is rich relative to Brent, and the arbitrage link keeps the prices closely connected. Now, with a pronounced glut in US Midcontinent inventories (Cushing is chock-full), WTI is at a discount to Brent and the traditional arb link is broken.

So, like Mike suggests, where you stand on this depends on where you sit. If you are in the ME or Asia or Europe, WTI isn’t as useful a benchmark as Brent. If you are in the western hemisphere, Brent isn’t that useful.

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