Oil Benchmarks: Widespread Confusion


"For years, prices of WTI and Brent were locked together, but that has changed."

The Economist

Finding out the price of oil used to be simple. A quick check of either of the two main gauges of international marketsóWest Texas Intermediate (WTI) or Brent Blendówould 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, and 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 Cushing, Oklahoma, which is strategically situated to serve the refineries of the Gulf of Mexico, and thence the petrol-thirsty northern seaboard. In recent months oil has poured into Cushing's growing and labyrinthine storage facilities.

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 lackluster oil demand in America.

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).

These price differences matter to businesses such as airlines, which hedge exposure to shifting oil prices. 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.

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