North Sea Brent and U.S. crude futures have shown signs of reversing their traditional roles as an unusual premium for the European benchmark has spread across the pricing curve.
The promptest Brent contract often rises above U.S. futures, also known as West Texas Intermediate (WTI), at this time of year when seasonal maintenance reduces European supply.
But as far out as 2009, theoretically higher quality U.S. oil has sunk below Brent.
"Futures markets expect that discount (WTI to Brent) to keep widening over time," Antoine Halff of Newedge brokerage said.
Front-month Brent crude futures for September delivery have traded at premiums to U.S. crude futures for September for most of the time since mid-July.
The premiums rose to as high as $2.40 a barrel last week, the widest since December.
Although front-month Brent still dips below U.S. crude at times and for now has lost its premium, Brent's relative strength is more sustained toward the back of the curve.
It increases towards the middle of 2009 and Brent remains the more expensive crude until the back end of the curve.
"Crude fundamentals are tighter in Europe than in the United States," said Mike Wittner of Societe Generale, referring to reduced North Sea loading programs for August.
The total production of four key North Sea crudes, including Brent, will fall by 11 percent in August, compared with July output, according to loading programs.
Already, crude stockpiles have fallen.
Industry data for 16 European countries has shown inventories below year-ago levels since June 2007 for every month except February.
Wittner also said refinery margins, or the profits from converting crude into oil products, were stronger in Europe.
They have drawn support from tight distillate supplies following the growing popularity of diesel cars and more stringent environmental regulations that have limited refinery output since last year.
By contrast, falling U.S. gasoline demand this year in response to high pump prices and economic slowdown has slashed U.S. refining margins, while inventories of gasoline and distillates in the United States are relatively comfortable.
Need for More Sophisticated Refineries
Both North Sea and U.S. crudes are fairly easy to refine, but U.S. crude tends to have a higher gasoline yield.
This used to make it more valued on the futures markets, reflecting the greater number of cars running on petrol in the United States, the world's largest energy consumer.
Brent and other North Sea crudes give rich yields of distillates, such as diesel, which has gained currency as a motor fuel in Europe because it is more efficient.
In a report earlier this month, the International Energy Agency (IEA), energy advisor to industrialised countries, said the global trend for more comfortable gasoline supplies and a shortage of distillates would continue into 2009.
Some analysts say the trend could last beyond that as production falls from mature North Sea fields and refineries are not yet equipped to produce sufficient volumes of distillates from alternative crudes.
U.S.-based First Energy Capital expects Brent to average higher prices than WTI in 2009 and 2010.
Andy Sommer, oil analyst at Germany's HSH Nordbank, forecast Brent and U.S. crude would be at parity for 2008-2009.
U.S. refineries tend to be more complex than those in Europe and are adapted to handling heavy crudes, such as Venezuelan, reducing the need for light oil.
"In Europe, we still need light crude like Brent," Sommer said.
How long it will take for Europe to match the United States' refinery capacity remains to be seen.
"It will take a long time to catch up with the U.S. in terms of upgrading capacity," one investment banker said.