Will WTI crude regain its status as the benchmark for crude prices?
About two months ago, the U.S. Department of Energy started using Brent crude as its benchmark for crude prices. It appears WTI could soon be the benchmark again, though.
Over the last several weeks, the spread between WTI crude and Brent has come in from Brent to being $23 over the WTI price to under $17 over on Friday.
It is no coincidence that this price movement has happened right at the time Seaway pipeline announced plans to expand capacity of the line that takes crude from Cushing, Oklahoma where WTI is delivered to the Gulf of Mexico. This pipeline is now carrying roughly 280,000 barrels a day and by the end of the month, the number could increase to 400,000 barrels a day.
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Why is this significant? The problem for years has been that WTI was considered landlocked with no way to get that crude to refineries in the Gulf and to other places in the country, especially the Northeast or even to export. Things could soon change, though, with U.S. crude production expected to reach 7.5 million barrels a day in 2013 and the possibility of the Keystone pipeline being approved. Such changes would only solidify the U.S. as a major producer of oil in the world.
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Brent crude production peaked in 1999 with 398 million barrels being produced that year. By 2007, however, it fell to 250 million barrels. Today, it stands at about 220 million. Most analysts expect the number to drop by another third by 2020. Brent is four different blends of crude with the 40's blend being the benchmark for prices. With the production of that blend being very low, only 280,000 barrels a day were produced in the third quarter. Due to most of it being taken out the ground and poor maintenance of production facilities, it opens up the contract for price movements that would not normally happen in a well supplied market.
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If that continues the world will look for another benchmark with stable pricing: cue WTI. In fact according to a recent article in the "Financial Times," ICE -- the platform where Brent is traded -- is already looking for ways to remedy the situation. It only makes sense that if this continues, the world will once again see WTI as the benchmark for crude, especially as its production is rising and the North Sea falling.