Now the Brent price stands at $110 a barrel, virtually  did not budge, while WTI dropped to $84 a barrel today, giving rise to a $26 spread per barrel.  Some now believe that the spread could reach $35 per barrel. All this is surprising given the fact that WTI and Brent are light sweet crude oil types, the world is awash with oil and the oil market is global and not regional in the sense that oil prices co-move in tandem over time. That implies that crude oils even of different types, particularly those of the light and sweat category, should move in lock to each other.

Is one of these prices wrong, and thus cannot perform its role as a light sweet benchmark?  Or is one of these oil types being manipulated or hoarded by oil companies? Does the release of WTI from the US strategic petroleum reserves (SPR) have something to do with it?

One major reason for the wide spread and the relatively downward rigidity of Brent price is that fact that the North Sea production has fallen 45 percent since April 2003, while  oil the oil storage tanks at Cushing, OK are filled with WTI oil  coming from Canada and other regions. Moreover, the decline of the North Sea production was exacerbated by  a series of natural disasters such as  fires, oil spills and other problems that have  helped cut a few hundred thousand barrels per day this summer. In contrast, the Gulf of Mexico problems have been less severe and and of less duration.

In terms of geopolitics, Libyan oil is basically bench-marked to Brent than to WTI, so does other oil in North Africa and the Middle East. Therefore, Brent should be more sensitive to this risk and reflect that in higher risk premium than WTI.

The release of 60 million barrels from emergency stockpiles should have aggravated the spread and favored Brent as half or this release came from the American Strategic Petroleum Reserves which are bench-marked to WTI [1].

There are also rumors that oil companies are hoarding Brent oil to keep its price is high. But why are the oil companies hoarding Brent and not WTI? Is it because of stricter regulations in the United States or is it because Brent is the weaker crude in this link? This does not make a lot of sense.

It's worth noting that the American price of gasoline has more closely followed the price of Brent than the price of WTI. While the American benchmark had plunged, the price of gasoline held steady like the price of Brent. Does this imply that oil companies also manipulate gasoline price in the United States or gasoline takes its cues from the Brent price? There are those who believe that the United States has been a net exporter of refined products for the last nine weeks and that may have affected gasoline price. All these factors suggest that petroleum markets are not palpable in the short run.

Is the oil market becoming less global? There are those who believe that WTI has become a financial asset and does not represent the global oil market. They see its price following oil companies’ stocks like those of Halliburton, Shell etc. I will defer more comments on this point to the readers

In conclusion, Brent and WTI have different fundamental and transitional factors, which send them on different price trajectories. None of them is wrong or stupid; they have changed and now play different roles. The link between them is broken and is getting weaker over time. This should have implications for research on oil prices and hedging and trading in the oil markets.


[1] For more information on the release of government oil stocks, please sees:

http://blogs.zawya.com/shawkat.hammoudeh/110708033540/

UPDATE

Let's all watch how the expected resumption of Libyan oil will affect the WTI-Brent spread.