Why the Price of Crude in America Is Out of Whack with the Rest of the World

December 17, 2013

It is a common misconception that one barrel of oil is much like another. Indeed, around 100 benchmark grades are traded around the world, though a couple garner the most attention. Americans focus on West Texas Intermediate (WTI). Most of the rest of the world uses Brent from the North Sea as a reference. When the two, differing slightly in quality, cost the same the distinction made little difference. In recent years the extraordinary flow of oil from American shale beds has led to a parting of the spigots, says The Economist.

  • A barrel of Brent currently changes hands for $109; WTI fetches just $98.
  • The spread first opened in 2011 as new supplies of shale oil from North Dakota and Texas supplemented the barrels already arriving at Cushing, Oklahoma.

As shale-oil boomed, a bottleneck developed in Cushing and the WTI price sank. But the price of oil entering the big refineries on the Gulf Coast, just 500 miles away, stayed tethered to Brent. To take advantage of the discrepancy in prices, barges, trains and even trucks were pressed into service to supplement the pipelines leading from Cushing to the coast.

The construction of new pipelines and a reversal of the flow in others have gradually undone the bottleneck in Cushing. In July the spread between WTI and Louisiana Light Sweet (LLS), the benchmark feedstock for Gulf refiners, almost disappeared. But the clearing of the bottleneck in Cushing has released a surge of light crude to the Gulf Coast, creating a new blockage.

  • Gulf refineries are using as much light and sweet American crude as they can, but most are designed to process heavier, more sulphurous grades from the Middle East and Africa.
  • Indeed, America still imports 7.9 million barrels per day.

Regulations, lack of infrastructure, and bans on export and types of domestic trade make getting rid of the excess supply difficult. Gulf refiners are turning the oil into products such as diesel and petrol, which can be exported, as fast as they can, but they are running at full capacity.

As oil begins to pool in the Gulf, a gap has opened between the prices of LLS and Brent, even as LLS and WTI have moved into alignment. The discrepancy in prices between the middle of America and the East and West coasts will persist until someone works out a way to move it around in greater quantities. But even if that happens, in a couple of years the whole country will have more light, sweet crude than it needs. If the oil continues to back up, prices will fall further compared with global markets, threatening production from high-cost shale beds and perhaps even smothering America's resuscitation as an oil power.

Source: "Spreading Disarray: Why the Price of Crude in America Is Out of Whack with the Rest of the World," The Economist, December 14, 2013.

 

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