HardAssetsInvestor

Written by Sumit Roy  |

May 16, 2012

Huge Pipeline Projects To Seal Gap Between WTI&Brent Prices By 2014 How Investors Can Profit

Details

With new pipelines carrying more WTI to the Gulf Coast, expect the recent price spread to completely close

Crude oil has plunged in recent sessions, pressured by concerns related to the health of the global economy and the sovereign debt crisis in Europe. In many ways, this correction feels like déjà vu; we saw similar price corrections in 2011 and 2010 for the same reasons.

Something we are also seeing again is divergence in the prices between the two pre-eminent crude oil benchmarks — Brent and West Texas Intermediate (WTI).

PRICES FOR BRENT & WTI

Historically, Brent and WTI traded at similar levels. Indeed, the higher-quality WTI often traded at a slight premium to Brent crude. But in recent years this relationship has broken down intermittently, with these hitches increasing in frequency and duration.

WTI has now traded at a discount to Brent for 21 months and counting, the longest such stretch in history. More importantly, we also see a significant discount through the entire forward curve up to 2020. This was not the case in past instances when WTI traded under Brent, suggesting that the market now sees a more permanent structural shift in crude pricing:

CRUDE OIL FORWARD CURVE