Brent Crude needs a nickname… While Black Gold and Texas Tea are common nicknames in the US for oil, we don’t know the equivalent for Brent Crude. But Brent is becoming more and more of a player with the glut in the US (because of new sources coming online) driving WTI prices down, pushing the spread between the two from the typical range of $3 or $4 all the way out to more than $25.
As a result, the Brent contract has come to be seen as a better representation of global oil prices, and that has driven greater trading volume to the Brent futures contract (which is traded at ICE) instead of the WTI contract (which is traded at the CME). All the more reason for a nickname. We’ve been wondering how that would play out in the competition between the two futures exchanges, but it looks like the bigger spread may not last long enough to matter – in the last few weeks, it’s taken a sharp turn back toward normal:
You see, the problem with trying to arbitrage this price difference was the lack of infrastructure – the US was set up to be a net oil importer, and moving huge quantities of oil out of the middle of the country was too expensive to make it worthwhile. But the CME Group’s online magazine sounds hopeful that this is beginning to change. Via Open Markets:
James Burkhard, vice president and head of oil market research of IHS CERA, said the spread will narrow once infrastructure is built, but that takes time. And there already have been changes, such as switching the flow in the Seaway pipeline from Cushing, Okla., to the Gulf to facilitate exports, but more is needed…
Once infrastructure is in place, Burkhard said eventually the price spread between WTI and Brent will likely start to reflect the cost of shipping oil from Cushing to the U.S. Gulf. “So you’re looking at a $3, $4 spread long-term rather than $20,” he added.
The reversal of the Seaway Pipeline to move oil south to the Gulf happened last year, and just a few months ago its capacity was more than doubled from 150,000 barrels/day to 400,000 barrels/day. Coincidentally, that’s right around the time the spread started narrowing. We saw a similar narrowing of the spread in late 2011, but this time around we’re seeing the effects of the structural shifts that are taking place to help balance the US and international oil markets. It’s beginning to look like the larger-than-normal Brent/WTI spread may already be nearing an end.
Fun fact via Wikipedia: The name “Brent” comes from the naming policy of Shell UK Exploration and Production, operating on behalf of ExxonMobil and Royal Dutch Shell, which originally named all of its fields after birds (in this case the Brent Goose).