MW: Oil market in flux as Brent and WTI trade places
Mideast protests boost Europe’s Brent while U.S. supplies hit WTI
By Claudia Assis, MarketWatch
SAN FRANCISCO (MarketWatch) — More than one hundred tradable grades of crude oil exist, their classification based on sulfur content and density. Yet for most of the world only two types of crude matter — West Texas Intermediate and Brent.
These twin high-grade barometers have strayed far from each other, turning their historical relationship upside down. That reversal is not expected to go away anytime soon, amid continued unrest in the Middle East and brimming supplies in the U.S.
For WTI, which trades on the New York Mercantile Exchange, at stake is its supremacy as a benchmark — and, by extension, its status as the main focus of interest for investors, and the holdings of exchange-traded funds such as the United States Oil Fund (USO 36.30, +0.24, +0.67%)
“Brent has become the more reliable indicator of global demand,” being faster to respond to geopolitical concerns, said Jim Ritterbusch, president at Ritterbusch & Associates in Illinois.
Energy products such as gasoline have followed Brent higher, and that is not expected to change, he added. Meanwhile, pressure on WTI has also weighed on prices of other crude-oil grades, a shift seen helping refiners such as Valero Energy Corp. (VLO 30.11, -0.18, -0.59%) Read more on how shifts in the oil market are helping Valero.
WTI is lighter and sweeter, making it easier and less costly to refine it into gasoline and other higher-value products. Because of that, it has historically traded a couple of dollars per barrel higher than Brent, the North Sea blend trading on London’s ICE Futures Exchange.
WTI’s premium started to break down last year as investors worried about lofty inventories levels in Cushing, Okla., the delivery point for WTI oil. When the first rumbles of pro-democracy demonstrations in Egypt were heard in January, the breakdown accelerated.
As a large share of the oil trading in Europe comes from the Middle East, Brent has rallied past $100 a barrel, and the blend traded at a premium, rather than a discount, to WTI.
Brent has surpassed WTI before, but never for as long and by as much as recently. The gap between March Brent and March WTI futures reached a record last week, around $16. It stood at $13.75 Thursday.
That has led some investors to believe they could be seeing the beginning of the end of WTI supremacy, with Brent taking its place as the most widely used marker for pricing an array of crude grades across the globe.
Brent for April delivery , currently ICE’s front-month contract, turned lower Thursday, down $1.19 cents, or 1.2%, to settle at $102.59 a barrel. That only chipped at Brent’s gain of 8.7% for the year.
WTI for April delivery (CLJ11 89.56, +0.72, +0.81%) , the corresponding contract month, advanced $1.14, or 1%, to $88.84 a barrel. The benchmark March contract (CLH11 86.74, +0.38, +0.44%) rose $1.37, or 1.6%, to settle at $86.36 a barrel.
WTI has lost 5.5% so far this year.
“The absolute spread has never been at such a high level and, above all, it has never remained there over such a long period. In the past, such discrepancy was usually observed at the expiry dates of the corresponding futures contracts or — as in late 2008/early 2009 — was a distortion as a result of a selling frenzy among investors,” analysts at Commerzbank said in a note to clients this week.
