September 24, 2010 at 2:05 am #2519
West Texas Crude Losing Status as Global Benchmark for Oil: Energy Markets
By Mark Shenk – Sep 23, 2010 6:00 PM CT
The shutdown of a U.S. oil pipeline that caused prices to fluctuate twice as much as in Europe is adding to concern that the benchmark contract for crude is failing to reflect supply and demand for energy.
The eight-day closing of the Enbridge Energy Partners LP 6A pipeline, which moves 670,000 barrels a day of Canadian oil to the U.S., caused West Texas Intermediate crude futures to trade in a $5.29 range on the New York Mercantile Exchange last week. That compares with $2.65 for the Brent contract in London.
Oil traders say the combination of last week’s price gap, the widest since May, and near-record supplies at the U.S. futures delivery point in Cushing, Oklahoma, has made West Texas Intermediate, or WTI, an inaccurate indicator for global demand at a time when the world economy is growing. Saudi Arabian Oil Co., the world’s biggest producer, stopped using WTI in January.
“WTI has proven itself over the last year to be a less- than-ideal proxy for global oil demand,” said Jason Schenker, president of Prestige Economics LLC an Austin, Texas-based consultant. Hedging with WTI exposes market participants to risks caused by disruptions and gluts in the central U.S., Schenker said.
Volatility averaged over the past 20 days for the contract closest to delivery, a measure of price swings in futures, fell to 28.6 percent yesterday from a two-week high of 28.8 in New York, as Brent declined to 17.4 percent from 19, the lowest level since April 30.
Crude oil for November delivery rose 47 cents, or 0.6 percent, to $75.18 a barrel on the New York Mercantile Exchange yesterday. Brent crude for November settlement increased 16 cents to $78.11 on the London-based ICE Futures Europe exchange.
Additional Hedging Cost
While traders profit from wider price swings, increasing volatility makes it more expensive for producers and consumers to use futures as a hedge.
Oil in New York touched $78.04 on Sept. 13, the highest level since Aug. 11, on speculation that the Enbridge pipeline shutdown would cause refineries in the Midwest to divert supply from Cushing or the Gulf of Mexico.
WTI traded at a discount to Brent of more than $5 a barrel from May 12 through May 18, the most in more than a year, when Cushing stockpiles climbed to a record 37.9 million barrels, according to the Energy Department, which started keeping records at the storage hub in 2004.
Cushing is landlocked and connected to pipelines that run to the Gulf Coast, Texas, the Midwest and Alberta. The closure of one of these pipelines or a nearby refinery can cause either a surge or drop in supply at the hub. A fire that shut Valero Energy Corp.’s McKee refinery near Sunray, Texas, left a glut in Cushing and depressed WTI prices.
Oil in New York has dropped 5.3 percent this year, while Brent crude is little changed, reflecting a rebound in demand as the world economy recovers from the worst recession since World War II. Global consumption will rise 1.9 million barrels, or 2.2 percent, to 86.6 million barrels a day this year, the International Energy Agency said in a Sept. 10 report.
Most of the crude shipped by the Organization of Petroleum Exporting Countries is high in sulfur and heavy, unlike WTI and Brent. These grades usually trade at a discount to the U.S. and European benchmarks. OPEC members were responsible for 57 percent of oil exports in 2008, according to the Energy Department.
“WTI is losing relevance because it’s a high-quality, low- sulfur crude oil, while most of what’s available is heavier,” said Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania. “Brent is also a high-quality grade, although WTI is higher, but it has more global relevance. WTI is not as accurate a gauge of the global supply-demand balance.”
Light-sweet grades are less dense and low in sulfur, making them easier to refine into gasoline. Heavy and high-sulfur, or sour, grades require further processing to meet environmental requirements.
Aramco began to use the Argus Sour Crude Index to price oil for delivery to U.S. customers in January, abandoning WTI, which had been used since 1994. The index, published by Argus Media Ltd, is calculated using three U.S. Gulf of Mexico grades: Mars, Poseidon and Southern Green Canyon.
Aramco’s chief executive officer, Khalid Al-Falih, said on Nov. 8 that WTI is disconnected with the overall market because most of the barrels his country sold were heavier and sour.
“The Saudi move to adopt a Gulf Coast crude index and the increasing gap between WTI and Brent add to concerns about the Nymex contract, which seems to be too tied to the dynamics of” the central U.S., said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington.
To contact the reporter on this story: Mark Shenk in New York at firstname.lastname@example.org To contact the editor responsible for this story: Dan Stets at email@example.com.
September 24, 2010 at 2:07 am #5490
Nice plug for Argus Sour Index. Also think from several of presentations that someone needs to start breaking the tie to WTI for lot products or spend lot time chasing down false changes.
Also might mention that Brent is barely behind WTI as bad benchmark for crudes in EU and changes would likely be more start against a new Index there as well. Both crudes are just too shallow (even with inclusion all new nearby fields in blend index) and neither traded at any depth.
Good start would be taking some presentations who had values charted against WTI or its delta to show the volatility in these shallow index’s that are not really there.
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