A Question about Oil Prices

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r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
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Posts: 257
A Question about Oil Prices

I entered the below question in the enrolled members area also. I am hoping for some opinions here as well:

I would appreciate it if anybody here could shed some light as to why there is such a disparity between the Nymex price for oil and the Dated Brent price. The difference is now approaching $10 a brl. I have been watching the price of oil for about 3 or 4 years now and have never seen a difference this great. Is the quality of oil sold on the Nymex decreasing (sour vs sweet)? I have not noticed any comment on this anywhere. Input anybody?

Tycer's picture
Tycer
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Re: A Question about Oil Prices

I've noticed that too. Perhaps Jim Puplava might have insight into it. Contact Info Here

r101958's picture
r101958
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Re: A Question about Oil Prices

I found my own answer and it isn't very pretty:

http://www.zerohedge.com/article/light-sweet-dire-divergence-just-another-paper-vs-physical-disruption

sevenmmm's picture
sevenmmm
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Re: A Question about Oil Prices

 

Great article. Cleared up a few aspects about oil for me, for sure. Here is are quotes to the linked pdf:

 

 

 

Looking at a comparison of the Poten Tanker Index’ historical reaction to the price spreads

in the above graph hardly leads one to conclude the spread has resulted in meaningful

shipping activity in the form of sustained healthy freight rates.   In fact, given the resulting

collapse of shipping rates following the 2008‐2009 jump in the Brent‐WTI spread, and the

current depressed tanker market levels in the face of the current spike, the picture again

seems to be pointing to a bleak outlook if the arbitrage (or lack thereof) is any indicator of

future tanker market health.

 


 

 

 Lastly, if this dynamic exists, it

certainly calls into question the relevance of the WTI price in the first place.  $100 per barrel

physical oil?  We’re already there.  $86 per barrel oil?  Maybe in the paper markets – but

don’t count on delivery.

 

 

http://www.zerohedge.com/sites/default/files/Poten%20Weekly%20Light%20Sweet%20Dire%20Divergence.pdf

 

Looking at a comparison of the Poten Tanker Index’ historical reaction to the price spreads
in the above graph hardly leads one to conclude the spread has resulted in meaningful
shipping activity in the form of sustained healthy freight rates.   In fact, given the resulting
collapse of shipping rates following the 2008‐2009 jump in the Brent‐WTI spread, and the
current depressed tanker market levels in the face of the current spike, the picture again
seems to be pointing to a bleak outlook if the arbitrage (or lack thereof) is any indicator of
future tanker market health

 

 

SailAway's picture
SailAway
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Re: A Question about Oil Prices

The link below from the EIA explains the pricing differences among various types of crude oil

 

http://tonto.eia.doe.gov/ask/crude_types1.html

 

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
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Posts: 257
Re: A Question about Oil Prices

Thanks to all for comments. Yes I saw the descriptions of each and what stuck with me is the fact that WTI is supposed to be higher grade than Brent. If that is the case then WTI should be more expensive rather than less expensive. I just read something further relating to this and that is that WTI suffers from the 'Cushing Effect' or is purported to suffer from it. If I interpreted correctly the Cushing Effect means that WTI has a bottle neck problem that results in stockpiles increasing even though demand may be remaining the same. I believe we can, less any critical thinking, accept that reasoning. However, conversely, I might also ask what happens to WTI stock levels if the government releases crude from the SPR? Would that not have the same affect as say, shorting the silver market? (note: I have read elsewhere that strategic release from the SPR has already been done)

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
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Posts: 257
Re: A Question about Oil Prices

Divergence between Brent and WTI/Nymex prices went over $14 today. Right now Nymex is $87.15 and Brent is $101.59. I, for one, can not explain this but would not exclude manipulation as a part of the answer. Actual gas prices look to be reacting to the price rise in Brent as opposed to any fluctuation with Nymex/WTI.

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
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Posts: 257
Re: A Question about Oil Prices

Over $15 difference now.

Brent $101.81 (+1.73)
NYMEX/WTI $86.71  (-0.23)

Oh, and by the way, Gas RBOB Futures 252.85 (+3.34)
Depending on where you live; add 50 to 90c to this

figure (2.52) and you have your pump price.

Tycer's picture
Tycer
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Posts: 610
Re: A Question about Oil Prices

I can't see it lasting very long. I don't know whether one will fall to meet the other, vice versa or meet in the middle.

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
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Posts: 257
Re: A Question about Oil Prices

I am more concerned with the 'why'. Things like this do not usually occur of their own volition. See below charts:

You can see the divergence of WTI and Brent above. Below you can see the price of heating oil and RBOB gas have followed the upward trend set by Brent above...not the downturn as reflected by WTI/Nymex.   ......And these charts do not even include today's prices which increased the difference between Brent and WTI to about $15.

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Re: A Question about Oil Prices

I guess I am almost the only person posting regarding this. I am glad, though, that I am not the only one recognizing the issue.

Comments to Martenson article in Zero Hedge tell me more regarding WTI/Brent spread that I posted in this forum:

Comment 1:

'Brent WTI spread now 15$ am I seeing that right?'

Comment 2:

'More than $15.  And so it shall remain while pipelines Houston to Cushing are strictly one way, north.  Well, wait.  It may not remain that way.  It may get wider.

Bottom line, the price of oil is presently $102/barrel.'

Comment 3:

'It's not insane.  Canadian tar sand crude is piped to Cushing **and it can't go south to Houston from there**.  It can't go anywere but the US, and not there very effectively because WTI just doesn't pump much anymore.  It can't get to where the demand is for Brent (China and India) so its price can't rise to the Brent price.

This is not going to change until China / India have a collapse of demand.  You can't drive price of something that is in shorter and shorter supply downward unless you drive demand downward.'

Comment 4:

'And therefore, WTI futures no longer serve as a benchmark for anything but identifying fools who bought into USO.'

 (-my opinion: this goes for Nymex as well)

 

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Re: A Question about Oil Prices

Not gloating....but in my post above...on Feb 9th I stated:

"I, for one, can not explain this but would not exclude manipulation as a part of the answer."

Below is the best (well researched) and by far the most disturbing (and most likely accurate) answer yet regarding the divergence of oil prices. Posted this evening. A very good read.

http://www.zerohedge.com/article/guest-post-dirty-rotten-scoundrels#comment-951825

 

SteveW's picture
SteveW
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Posts: 490
Re: A Question about Oil Prices

While I do not wish to dispute that WTI pricing might well be manipulated the standard reason for the price spread is the Cushing bottleneck.

http://www.bloomberg.com/news/2011-02-07/louisiana-oils-reach-widest-premiums-to-wti-since-at-least-1991.html

Quote:

"The bottleneck at Cushing is depressing the price of WTI because it’s landlocked,” said Sung Yoo, an analyst with JPMorgan Chase & Co. “WTI is trading at a discount relative to all the other global crudes."

Light Louisiana Sweet’s premium strengthened 70 cents to $13.50 a barrel at 2:12 p.m. in New York, according to data compiled by Bloomberg, the widest gap since 1991 when Bloomberg began collecting the data. Heavy Louisiana Sweet’s premium to WTI increased 50 cents to $12.50 a barrel.

Gulf Coast sour, or high-sulfur, grades also increased relative to WTI. Mars Blend’s premium strengthened $1 to $7.75 a barrel, while Poseidon increased 85 cents to $7.85 over the benchmark. Southern Green Canyon’s premium rose 25 cents to $6 a barrel.

Thunder Horse’s premium to WTI strengthened 65 cents to $11.50, the highest level in Bloomberg data going back two years. West Texas Sour’s discount widened 10 cents to $5.40. WTS is delivered in Midland, Texas, so its price is less influenced by imports.

Syncrude weakened 50 cents to a premium of $4.50 to WTI. Syncrude is a light, low-sulfur synthetic oil derived from the tar sands in Alberta.

The bottom line is that benchmark (WTI pricing) is essentially a fiction since the similar Light Louisiana Sweet is priced about the same as Brent in the $100 range rather than around $90.

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