FINDING out the price of oil used to be simple. A quick check of either of the two main gauges of international markets—West Texas Intermediate (WTI) or Brent Blend—would suffice. But this year, as oil prices have soared, a gap has opened up between the two benchmark crudes. On June 15th the spread hit a record: close to $23 dollars a barrel.
For years prices of WTI and Brent were locked together, though the higher-quality American WTI oil generally traded at a premium of a dollar or two to reflect its slightly lower viscosity and sulphur content, which ease refining into petrol, heating oil and other products. Patterns of supply and demand in America, the world’s biggest consumer and importer of oil, rarely diverged much from the rest of the world, where Brent is the main indicator.
That has changed. The contracts for WTI stipulate “for delivery” to windswept Cushing, Oklahoma (population 8,371), which is strategically situated to serve the refineries of the Gulf of Mexico, and thence the petrol-thirsty northern seaboard. This gave oil firms lots of incentive to build pipelines to Cushing: in recent months oil has poured into Cushing’s growing and labyrinthine storage facilities.
There it has stayed. A new pipeline from Canada’s oil sands, which opened in February, and unexpectedly large flows of shale oil from North Dakota’s Bakken field have coincided with lacklustre oil demand in America. Planning difficulties mean that a proposed new pipeline from Cushing to the gulf refineries (from where the oil can be shipped abroad) will not open until 2013 at the earliest. Attempts to shift the oil by road and rail have made only a small dent in rising inventories.
Meanwhile recent maintenance shutdowns in the North Sea have worsened already declining supplies from ageing fields of Brent crude. Brent’s ready access to seaborne markets means that its price is far more sensitive to booming demand in China and elsewhere. Hence the spread with WTI in recent months (see chart).
Over the past few days another, more mysterious spread has opened up. The price of Louisiana light and sweet (LLS), an oil grade that feeds America’s gulf refineries, has detached from Brent too, selling at around $4 a barrel less rather than its usual premium of a dollar or so.
Even as WTI and Brent took different tacks, LLS and Brent had remained in lockstep. The reasons for the new divergence are hotly debated. Analysts at Goldman Sachs offer several theories, including a shortage of this grade of oil in Europe (it is of similar quality to absent Libyan supplies) and a general redirection of crude to booming Asia, without any corresponding rise in demand for LLS.
These price differences matter to businesses such as airlines, which hedge exposure to shifting oil prices. Long-dated futures markets for jet fuel are highly illiquid. Much of the hedging is carried out with WTI contracts but the actual fuel is mainly refined from pricier oils. Commodities funds that hold WTI are also scratching their heads over what to do about buying and selling an oil that no longer reflects the wider global market.