In this week’s episode of the Periodical Podcast, your hosts Kevin and Tavis investigate how the price spread between the world’s most traded crude oil blends and the most actively
The price spread between the world’s most traded crude oil blends and the most actively traded commodities in the world generally track one another, but divergences often reflect technical, supply/demand, or geopolitical issues. Over the course of history, the spread between Brent crude and WTI blends has grown, shrunk, crossed paths, and reversed again countless times. As a result of reduced U.S. pipeline constraints, ongoing OPEC+ production cuts, and China purchasing record amounts of WTI crude oil, the spread between Brent and WTI crude oil prices has begun to shrink close to zero. The future may hold a reversal giving WTI prices the upper hand.
The cost to produce a barrel of oil varies throughout the world and impacts the determination of global benchmark prices. If only a portion of global supply is economic at current commodity prices, global demand will be what influences the price floor. Once inventories are drawn down, supply/demand economics will drive up the price of oil to ensure supply can meet demand. Be sure to check out the periodical below for an in depth analysis of the economic price to produce a barrel of oil around the world, and why global demand will be the driver for oil prices to set a $55-60/bbl floor for the foreseeable future.
Financial markets attempted to buoy benchmark prices as oil and gas markets became volatile in Q1 2020. This created a disconnect in the price spreads between the NYMEX WTI futures benchmark and regional spot prices. The disconnect continued to grow at the beginning of the year until it reached a tipping point in April when prices plunged. Ultimately supply and demand at the regional level through purchasers like storage companies, airlines, and refineries will be what control the true value of crude prices and bring the market back into equilibrium.
The worst of the coronavirus induced oil crash seems to have bottomed out as storage inventories saw fairly dramatic drawdowns in the final weeks of May, a reversal of events from the past several months. Such relief may be all but eliminated in the ensuing week as an influx of nearly fifty million barrels of foreign crude oil is about to reach the U.S. Gulf and West coasts. The volume of incoming crude may offset most of the production cuts generated by domestic operators and extend low oil prices until the inventories can be worked back down.
There is a strong inverse relationship between crude storage levels seen at the Cushing, Oklahoma facility and WTI futures price. This relationship exists even though the storage facility only holds a percentage of total domestic crude inventory. In fact, data suggests that in order for crude prices to stabilize above $55 per barrel, inventory in Cushing will need to drop below 47.5 million barrels, or about 62% storage utilization at the facility.
Speculator sentiment towards future pricing of commodities can create a wedge between regional and benchmark prices even though they are based on the same supply-demand principles. As long as financial markets continue to buoy WTI futures, these price spreads will continue to widen.
Introduction Over the past weeks, the oil market has been in a state of panic following the tensions between the United States (U.S) and Iran involving the killing of an