What the hell is going on in with crude oil? Normally, West Texas Intermediate (WTI) is oil’s benchmark. At sixty-five bucks, the WTI price isn’t alarming. It’s doing what oil’s been doing for the last year, hovering stubbornly between USD$60 and USD$70.
But Brent Crude, the price of oil from Britain’s North Sea, is trading at USD$70.50-a full five dollars higher than WTI. This is unusual, historically speaking. WTI trades at a premium to Brent Crude because WTI is a lighter grade of crude. By lighter, we mean that WTI crude, owing to its purer, less sulfuric quality, is less expensive to “crack” into refined fuels for re-sale to the public. A product with a built-in higher profit margin should trade at a spread to an inferior grade of crude. So what does persistence of the high spread between Brent and WTI tell us?
It may very well be telling us we have entered a new phase in the oil age, where the price of oil is based on heavier grades rather than lighter grades. That would be significant because it indicates that the supply of light, sweet crude oil from the Middle East and East Texas is declining relative to heavier, sour crudes from places like Venezuela and Russia (the world’s second largest producer behind Saudi Arabia). It’s a change in the composition of world oil production that favours producers and refiners of the sour stuff.
In simpler terms, the future of oil is sour and heavy. Brent could be the new global benchmark, reflecting new global production realities. Not that the light sweet stuff will go out of style. Just the opposite, in fact. With a bottleneck forming in the refineries, we’d expect the price of the light sweet stuff to actually go up.
The oil market may well segment into something like the market for red wine. At one end is sour crude, the table wine of the global economy. At the other end, light sweet crude, the finest vintages affordable to the world’s high-rolling economies with deep pockets.
Either way, the oil price is just one tiny hurricane in the Gulf of Mexico or one big Middle East war away from “popping” again. And with refinery capacity for sour crude being somewhat limited, exporters of refined fuels (Europe especially) should do quite well. Importers of refined fuels, on the other hand, will find out that being so far downstream from the world’s oil supply has real and unpleasant consequences, including but not limited to, soaring petrol prices and massive queues at the petrol station. We reckon in about two years it’ll be just like 1979 again.
Markets and Money
What do you think will happen to the oil price? Leave a comment below.