More Thoughts on WTI and Brent Oil Prices

Back in February, I wrote a post called Why are WTI and Brent Prices so Different? In it, I talked about a number of issues, including pipeline issues, contributing to the differential between Brent oil prices (high) and West Texas Intermediate oil prices (low).

Recently, I have had some additional insights into what is happening that I would like to share with others. These include:

1. The WTI / Brent oil price differential has, in fact, led to lower prices on oil products in the United States than the rest of the world, and has helped (at least a little) to keep the United States out of recession.

2. As a corollary to (1), if we can fix the WTI/Brent price differential, it will mean, at least initially, higher prices for oil products for US consumers. It may also cause the US to slide into recession, lowering oil prices for both WTI and Brent.

3. The situation giving rise to the WTI/price differential may be more complex than just lack of pipelines. Part of the issue may be limited refinery capacity to handle the heavier, sourer oils (even though, ironically, neither WTI nor Brent is heavy or sour). If this is the case, even if the WTI /Brent price differential is fixed, heavy sour grades may still trade at a big discount to light sweet grades, so the problem may be transformed to a new problem, not eliminated.

In this post, I will explain these observations.

What is happening to Brent and WTI prices?

The first question we might ask is, “Is Brent price high, or is WTI price low, or is it a combination?” To look at this, I compared both prices to the world average oil price, as calculated by the US Energy Information Administration.

Click here to enlarge

Figure 1. Comparison of WTI, Brent, and world average oil prices, based on EIA data.

The answer seems to be primarily that WTI has fallen relative to world oil prices. Figure 1 shows that during 2010, both WTI and Brent prices tended to be a little higher than the world average oil price. Starting shortly after the beginning of 2011, Brent rose a bit relative to the world oil price–about $1.60 per barrel higher relative to the world oil price, while WTI dropped below the world average oil price. On average, WTI has averaged $15.75 lower than would be expected during 2011, based on 2010 relativities and the average world oil price. (more)