Michael Giberson
The WSJ’s Environmental Capital blog notes that the price for “WTI”, which is to say the price for West Texas Intermediate grade of crude oil, a commonly used benchmark for quoting crude oil prices, has been drifting out of the usual relationships with other commonly used benchmarks, like Brent crude. (Here is Wikipedia on WTI and Brent.)
The post cites opposing views from FT’s Alphaville blog and Platt’s The Barrel. At Alphaville, the changes indicate that WTI is losing touch with reality:
Essentially that means once Cushing storage nears capacity WTI will become increasingly depressed versus other crude grades and therefore disconnected from real oil supply/demand fundamentals. As a result it will no longer be a good indicator of US crude prices.
While at The Barrel, the WTI price movements are reflecting reality:
So it’s WTI that’s reflecting what is going on in the world: the collapse in demand, oversupply and a resulting enormous contango that is encouraging storage. On this one, WTI is ahead of the curve, not behind.
Why the difference?
Maybe where you sit affects what you see. Should I say more clearly that the U.K.-based Alphaville blog favors the local Brent benchmark, while the U.S.-based The Barrel thinks that WTI is all right.
My view, from here in Lubbock: West Texas Intermediate is A-OK.
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.