Oil prices diverge
When reporting oil prices, we usually don't think to much about what they are exactly. It's just price of oil, that must be the same everywhere, right?
Not so. The oil prices we hear about in the news are the prices of different benchmarks of oil. These benchmarks indicate slightly different varieties and grades of oil. The most common ones are Brent crude and West Texas Intermediate (WTI).
Additionally, the oil contracts that these prices are based on are for oil delivered to different places in the world. The WTI to a a small town called Cushing, Texas, while Brent is for delivery anywhere in the North-Sea. Not that all oil that is sold in the world is transported to these two places: The prices are benchmarks that agreements for delivery of other grades of oil to other places in then discount or add to given what the differences are.
The prices that we hear about in the news are the prices of a barrel (approx. 159 liters) of these benchmarks, often without mentioning which benchmark it is. The fact is that historically (these benchmarks go back to the 80's) the prices of these benchmarks have been almost exactly the same, within a dollar of each other most of the time.
But this year, that's really changed. The prices of Brent and WTI started diverging late last year, and the spread is now more than $14 per barrel.
The main reasons cited for this are
- Unusually high reserves at Cushing, that drive keep the price of WTI down
- The unrest in Libya, Egypt and elsewhere in the middle-East driving the price of Brent oil up, as they more directly affect delivery in Europe
What is more, the future markets seem to believe that this spread will continue to be high several years into the future. Given that the stocks in Cushing can hardly last forever, does that mean that future traders fear continuing unrest in the middle-East?
Note: Historical and future oil prices are among the premium data sets that you can subscribe to on DataMarket if you want to keep an eye on these trends.