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WTI: No Longer A Benchmark For Oil Prices Print E-mail
Analysis | Research | Written by Wells Fargo Securities | Mon Feb 13 12 11:31 ET

The continued divergence between the price of WTI and Brent has made the use of WTI as a benchmark for petroleum prices in the Americas worthless today.

The Price of WTI Has Lost Its Importance

The continuous divergence between the price of West Texas Intermediate (WTI) and Brent prices has called into question whether markets should continue to consider the price of WTI a benchmark at all. The biggest problem for WTI is that the physical characteristics of the Cushing, Oklahoma delivery point for WTI has been broken and has rendered the price of WTI obsolete as a benchmark for oil and gasoline prices in the U.S. However, markets have remained efficient in the sense that they have easily shifted their attention to alternative benchmarks, as is the case with the price of Louisiana Light Sweet (LLS) crude. In the past, the price of LLS remained very close to the price of WTI. However, since the divergence between WTI and Brent started, the price of LLS has followed the later rather than the former. Thus, markets have already chosen to de-emphasize WTI as a benchmark price for oil. In addition, the price of U.S. gasoline has followed the price of LLS and Brent rather than the price of WTI.

Something is Fishy!

Many analysts continue to argue that the most important reason why the price of WTI has diverged from the price of Brent and LLS is that WTI is land-locked. However, WTI has always been land-locked, but before this episode it had remained historically close to the price of Brent. What is the difference today? The answer to this question will probably give us a better clue of what the future is for the price of WTI. The second reason that has been espoused is that oil inventories in Cushing, Oklahoma are too high. However, those inventories have been coming down rapidly, and not much has happened to the spread between WTI and Brent.

Brent is Used to Price Two-Thirds of Internationally Traded Oil

There are probably two factors that could be helping to keep the spread between Brent and WTI elevated today. The first one is that the price of Brent is the benchmark for pricing two-thirds of internationally traded oil. This means that Brent has become a “better” measure of world petroleum prices than WTI. Second, the increased supply of oil into Cushing from other parts of North America - e.g., from Canada’s oil sands - has clearly altered the functioning of the WTI market temporarily. This is preventing WTI from being a good measure of the risks associated with the world market of petroleum in today’s difficult international environment. Thus, we expect this divergence to be temporary and for WTI to go back to being a trusted benchmark for the price of petroleum in this hemisphere. However, it is very difficult to know how long this will take.

What is interesting is that whoever has access to buying WTI at current prices is making a hefty profit by buying cheap petroleum and selling gasoline at levels determined by Brent/LLS prices.

Wells Fargo Securities

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