Remember the good old days when you could count on the famous "West Texas Intermediate" or "WTI" grade of light sweet high yielding crude oil to lead the globe and trade at a premium to its sister in the North Sea known as the Brent Blend? Well those days are gone as Brent has gone crazy leaving many analysts and long time market watchers scratching their heads.
The Brent/WTI spread trade was a highlight in yesterday's trading session as the differential spread price of Brent crude oil traded $27 a barrel higher over WTI. While WTI oil fell dramatically on fears over the global economic slowdown, the Brent crude soared driving it to a record premium over the former leader of the oil price world, West Texas intermediate. Why did Brent seem to defy the rest of the market's pessimism while WTI seemed focused on the market turmoil and increasing odds of global oil demand destruction? Does WTI have it right and has Brent just gone crazy?
Yes, Brent went crazy but crazy like a fox. The truth is there are some very strong, fundamentally sound reasons for Brent trading at a premium to WTI and some real reasons why the spread extended the move to a record high yesterday. Anyone that has followed the spread should be aware of ongoing production problems in the North Sea that have tightened supplies of that sweet blend in Europe. Because of problems at oil platform North Sea Forties, Brent blend traded at a three year high as demand in Europe rose on a seasonal basis ahead of winter at a time when supplies have been tight and refining margins in Europe have been good. Dow Jones Newswires reported that 24 cargoes loading this month have been delayed, trading sources said on Tuesday, due to oilfield problems. In other words, there are ships waiting to pick up oil that is not even there yet.
In the past European refiners have looked to Libya as a replacement for Brent crude because of its high quality and simplicity to refine. In fact one of the reasons Brent crude gained ground on WTI in the first place was the unrest in Libya. Of course with reports that Gaddafi is seeking asylum, (Hey I thought you were going to fight to the death! You promised!) and the rebels winning the war, there was hope that Libyan oil would rejoin the world stage rather quickly. Yet perhaps those hopes are being dashed with reports of growing factions in the rebel group and fears that the rebels may not be as ready to assume leadership and stability as many had hoped. There are rumors of reprisals and some tribal tension. These rivalries reduce the odds of the hoped for quick return to production pitting more pressure on the unstable North Sea supply.
At the same time there are fears surrounding China's oil leak and its impact on Chinese offshore oil production's. Due to a leak, Conoco Phillips has been told to shut China's biggest offshore oil field. That lack of production means China will be in the Brent market looking to replace those missing supplies. Conoco Phillips was surprised by the news and has already apologized to the Chinese government. Still they only own a 49% stake in the oil platform and China's CNNOC owns the rest. No word on whether the Chinese are apologizing. Well apology or no apology the shutdown caused a surge in Brent crude buying.