Brent – WTI disconnect

Recently, an enormous 33% premium has developed for Brent. To me, this gap is utterly inexplicable except by technical factors. Translation: some players have a huge long position of WTI and they are getting squeezed.

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If you are a commodities person at all, you will know that there are two major types of crude traded on exchanges. One is Brent Crude which is the type of crude oil that is produced by the Norwegians and the British in the North Sea. The other is West Texas Intermediate (WTI), which is the oil grade produced in West Texas. Crude oil for delivery is quoted in reference to these two grades of oil.

Recently, an enormous 33% premium has developed for Brent. To me, this gap is utterly inexplicable except by technical factors. Translation: some players have a huge long position of WTI and they are getting squeezed.

In Wikipedia’s definition of WTI, they note – as I have – that WTI should trade at a premium to Brent because it is a lighter grade that is easier to refine. They add this note:

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Although WTI is expected to command a higher price than Brent crude, on May 24 2007, it was priced at $63.58 per barrel as against $71.39 per barrel for Brent (Bloomberg). The change in price differential may have been due to a temporary shortage of refining capacity; on April 13, WTI Crude at Cushing may have temporarily lost its status as a gauge of world oil prices. A large stockpile of oil at the Cushing, Oklahoma storage and pricing facility (mainly due to a refinery shutdown caused prices to be artificially depressed at the Cushing pricing point. As stockpiles reduced, the WTI price increased to exceed Brent once again.

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Note that this is an $8 premium that represents less than 15% of the WTI price. We are seeing a premium double that today which cannot be explained through refining shutdowns or anything like that. However, as Yves Smith recently pointed out to me, there is a huge glut of supply entering the States at Cushing (to where WTI is delivered) because of the limited storage capacity. But is this the technical factor creating the drop in WTI? The only other thing explaining this anomaly is that someone is losing their shirt in the commodities market right now.

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Source
Commodity Futures – Bloomberg

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