Why Is WTI Much Lower Than Brent?
The spread between Brent and NYMEX crude is currently around $15 a barrel and according to Jim Bianco, the president of Bianco Research, this is due to one pipeline pumping crude from Canada into Cushing near Oklahoma City.
"Events are causing NYMEX futures contracts that are delivered in Cushing Oklahoma to be very unrepresentative of world crude oil prices," Bianco said.
"The price of crude oil between two delivery points in the United States varies by more than 20 percent. Did the spread ever get this wide in 1911 when crude oil was delivered in whiskey barrels via mule?"
"Cushing Oklahoma is a landlocked crude oil market served by pipelines. The new Keystone XL pipeline from Alberta Canada is coming online and causing a glut," he added.
There is a lack of storage for all this oil coming into Cushing from Canada, hence the drag on prices, Bianco explained.
New York Mercantile Exchange futures contracts are settled on the Cushing Price.
"As a consequence, Cushing-delivered crude oil is trading as much as $14 a barrel below other world benchmark crude oil prices. Speculators, engineers and refineries are rushing to take advantage of this situation," Bianco said.
"Until the Cushing glut subsides, we must look at other world benchmarks like Brent to get a better gauge of world crude oil prices. When we do, we find energy prices look a lot like food prices as they have been rising smartly over the past few months," he added.
The TransCanada pipeline will make it to the Gulf Coast by 2013, which will remove the disparity in prices, according to Bianco.
He said there is $2 billion worth of oil in the pipeline at any time moving at 5 miles an hour from the north to the south.
"Trying to transport that much oil by truck or rail would be impossible."