There has been a lot of speculation as to why there is a great difference between Nymex West Texas Intermediate (WTI) and Brent crude oils. Right now this difference or ‘spread’ is about $9.33 with the Brent crude priced higher than the WTI crude.
Simplest reason is most likely!
Ordinarily, the WTI which is deliverable in Cushing, Oklahoma, is priced at a slight premium to Brent. Cushing crude is a higher quality light, low sulfur refinery stock. Product is centrally located within the world’s largest energy market. Brent is a term which represents a number of different North Sea grades which tend to be heavier and more ‘sour’, containing more sulfur. The WTI market is much larger than the Brent market which trades on the International Commodity Exchange (ICE).
Blah, blah, blah, you knew all this already!
Most of the reasons given for the price differences have to do with the presumed difficulty in moving crude in and out of landlocked Cushing relative to the ease of shipping Brent products to and from European tanker ports. The distance between the two physical markets removes any arbitrage opportunity. To effect it, fuel available in Cushing would have to be shipped by pipeline to a tanker port in the Gulf coast or Eastern part of the US then transshipped to the EU markets.
Another reason is a squeeze on WTI shorts by traders trying to profit by a narrowing of the spread.
Taking a page from estimable Harvey Organ’s gold newsletter I wanted to take a look @ WTI short positions to see if price suppression activity is taking place as is apparent in the precious metals markets. This does not mean manipulation per- se as the bottom line for all business is to find paying customers. If the customers cannot afford a product they won’t buy it and any hesitation to buy is a risk. Holding the price of any product as low as possible by any means is good business, particularly when the price is of a product central to the ‘American Way of Waste’.
This chart is from the US Commodities Futures Trading Commission. This agency provides data on all commodities traded within the US, something that cannot be had for the ICE.
As you can see, from 2004 onwards, both the longs and short together had over 130% of the crude market. It’s not my chart! Plus, it’s the relationship between longs and shorts over that time which matters. 🙂
The black arrow indicates the number of commercial shorts relative to commercial longs is higher than it has been @ any time since 2007. Commercial traders are the refiners who take deliveries and make use of crude oil rather than non- commercial speculators who make bets on price movements.
The short positions hedge oil the held by refiners, they also represents forward demand brought to the market at a price that in this particular case is lower than that found on other exchanges.
The short positions don’t represent optimum profits in the New York Mercantile Exchange, they aren’t intended to. Risk exposure is arbitraged to Brent contracts @ ICE. Refiners can afford to lose a little bit on positions in WTI because they make up the amounts on the other exchanges. Since the sale of lower priced gasoline is guaranteed, there is little harm to not taking the last dollar off all of the tables. Refiners are ‘renting’ the risk that lies in the time cost of higher gasoline prices to motorists overseas: Here’s a chart of US average gasoline prices from one of my favorite info sources, Gas Buddy:
Gas @ the Brent crude price of + $100 per barrel would mean gasoline prices of twenty- to thirty cents a gallon higher than the current average of $3.09. Gasoline would indeed sell at the higher input price, but it would take a bit more time for each gallon. The increased costs of both the fuel itself and the extra time would be felt elsewhere in the vast American petro- supply chain. The larger than average short WTI position holds down gas and other petroleum prices in the US while the price pressure is arbitraged overseas.
Gasoline prices are politically potent in the US in ways that other commodities are not. Gold can be priced @ $10,000 per ounce and gold- holders would consider this hyperinflation to be an unadulterated good thing. Most people wouldn’t care. $3.50 gasoline causes irate motorists around the country to dial their Congresspersons and Senators and demand sanctions on oil price ‘gougers’ and ‘manipulators’. The traders are put into the spotlight in ways traders aren’t in UK where prices have to rise much more sharply to gain regulatory attention.
Gas is also the loss- leader to great parts of the US economy. The cadaverous US auto industry is in (apparently) pink- cheeked health due to the increased sales of SUVs and giant pickup trucks. Higher gas prices threaten these auto categories along with the car industry itself. High crude prices mean high distillate costs which increase airfares ‘n’ fees while adding to the price of goods shipped by diesel truck. High jet fuel costs cramp airline profits while high diesel costs make everything including food more expensive. Higher prices mean fewer customers and the cycle of bankruptcy is accelerated.
The guess is that the crude traders are taking a bit less profits in the short term by means of a larger than usual short position in WTI. The same traders are taking more profits in Brent. By doing so they keep the lid on fuel prices and prevent what’s happening in Cairo from taking place in front of the US White House.
How long this can be kept up is another issue altogether …
EDIT: Keeping an eye on Saudi Arabia.