Friday, February 11, 2011

WTI-Brent price divergence hits record $16

The price difference between the world’s top oil benchmarks reached an intraday record of more than $16 a barrel, doubling in three weeks, as West Texas Intermediate oil disconnects from top global oil references Brent and Dubai. The spread fell back to just above $14.

The divergence, which is wreaking havoc among energy investors and traders, prompted Saudi Arabia two years ago to drop WTI as its benchmark for pricing oil to US customers.

Dispatches from the US embassy in Riyadh, obtained by the whistle-blowing website WikiLeaks, quoted Prince Abdulaziz, Saudi’s deputy oil minister, as describing the WTI market as “too much like gambling”. According to the cables, Saudi officials explained to US diplomats that the shift to a new benchmark would leave the kingdom “less subject to speculative price swings”.

In the past, Saudi officials have highlighted technical problems with WTI, rather than the influence of speculative price swings, as the reason to drop the benchmark.

The WTI-Brent price divergence meant that companies hedging their exposure to rising energy prices through WTI contracts were left exposed to losses, analysts said.

WTI is the backbone of the New York Mercantile Ex­change’s flagship oil contract, the world’s most liquid oil futures contract, which is often cited as the “real” price of oil.

But a surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed the value of the benchmark against other yardsticks. The International Energy Agency said on Thursday that with “few relief valves” to cut the stock overhang in Cushing, the price dislocation “may persist for months [or years] to come”.

CME Group, which owns Nymex, has strongly defended the WTI contract, saying the price difference between its benchmark and Brent is a “cyclical phenomenon”.

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