Oil Refiner Trades to Play the Brent/WTI Crude Oil Spread

Richard Bloch submits:This oil market reminds me of a surrealist Dali painting. It just seems all warped, distorted and twisted out of shape. Here’s what I mean: Want some oil delivered in the future, say a year from now? Take your pick. If you want West Texas Intermediate (WTI) crude, get ready to pay up. Sure it’s cheap, but oil for delivery in a year costs about $3 more per barrel.

West Texas Intermediate crude rose after a U.S. government report showed that inventories declined at Cushing, Oklahoma, the delivery point for the contract. Futures climbed as much as 1% as the Energy Information Administration said that supplies at the storage hub dropped 652,000 barrels to 49.1 million in the week ended May 3. Nationwide stockpiles rose 230,000 barrels to 395.5 million, EIA data show.

The collapse in the price difference between the world’s two most-traded crude oil grades is fulfilling a prediction Goldman Sachs Group Inc. has held for more than a year. Bank of America Corp. says it won’t last.

U.S. oil exports are poised to reach the highest level in 28 years as deliveries to Canada more than triple, helping bring down the price of the global benchmark Brent crude relative to U.S. grades.

Enterprise Products Partners LP and Enbridge Inc. have completed an expansion of the Seaway pipeline that will increase the supply of crude oil from the U.S. Midwest to refineries along the Gulf Coast. The 500-mile (805-kilometer) line running from Cushing, Oklahoma, to Freeport, Texas, has resumed full service after shutting Jan. 2 to complete the final connections necessary to expand the line’s capacity to 400,000 barrels a day from 150,000 barrels, the companies said.

Irfan Chaudhry submits: The two most widely used and traded crude oil bench marks are West Texas Intermediate (WTI) (to be delivered at Cushing, Okla.) and Brent (delivered at Brent in Europe). WTI crude is the U.S benchmark and used for 40-50% of the world’s crude oil. Brent crude is made up of different types of crude oil found in the North Sea.

By HiddenValueInvestor:Bakken spot crude prices have traded at a premium to West Texas Intermediate spot crude prices since September 4. Bakken spot crude has not consistently traded at a premium to WTI since October of 2011 and has spent much of the last year trading at a discount of $10 or more. Over the last two weeks Bakken spot crude prices have traded at an average premium of $5 per barrel over WTI. The factors that have created the premium pricing are likely to stay in place into 2013.

The puzzling differential between the price of oil in different markets seems to be persisting. For most of the last decade, there was very little difference between the price of West Texas Intermediate traded in Cushing, Oklahoma and that for North Sea Brent in Europe. But a $10-$15 spread between the two developed at the end of January and has remained ever since.