The impact of these disparate activities in diverse oil producing provinces can be seen in the spread between WTI crude oil and Brent, its international counterpart.
Crude oil distribution in the United States has been designed to carry crude oil from producing regions of Louisiana and Texas to refineries in the Midcontinent. The development of crude oil in North Dakota changed the calculus of traditional oil distribution. Cushing, Okla. is the location at which WTI futures contracts are priced. WTI at Cushing had been landlocked and values depressed relative to U.S. coastal crude oils, themselves tied to Brent crude oil. There was no economic incentive to bring that crude oil to refineries on the Gulf Coast.
Increasing domestic crude oil output is putting pressure to improve transportation facilities which historically were not designed to carry crude oil from places like the Dakotas, or Cushing OK or West Texas to the Gulf Coast.
Reversal of the Seaway pipeline has been one response to this problem. A parallel Cushing-to-the-Gulf line is now under development, adding another 450,000 barrels per day to capacity. It is scheduled to come on line in the first quarter of 2014.
These lines are helping drain inventories at Cushing. Stocks at this critical location are now (late August) at 36.6 million barrels. Supplies at Cushing have declined 28.5% since reaching their high on July 19, 2013 at 51.2 million barrels. The drop, so deep so quick, offers stark testimony of the power of economic incentives to enforce price equilibrium on a market that had been badly mispriced between midcontinent and coastal crude oil values.
Some observers expect stocks at Cushing to fall to 25 million barrels in the years ahead. This level is more typical of 2008 when balances still reflected the dominance of Gulf-to-Midcontinent crude oil movements.
The spread between WTI and Brent crude oil has been used to gauge the importance of foreign crude oil in pricing oils in the United States. The spread has narrowed in recent months, reflecting the expanded availability of U.S. crudes. This should continue as the transportation system carries more U.S. oil to coastal refiners.
WTI and Brent crude oil values have come together for the first time since August 2010. With parity, the impact of the cost of rail transportation from the Bakken eastward has now to be resolved.
Once parity was achieved in the spread between WTI and Brent, a widening of the difference came as no surprise. It may have reflected profit taking by traders that rode the difference down from the mid-teens. More significantly, the Brent leg of the spread was far more impacted by events in MENA. By Labor Day, the difference between WTI and Brent expanded to $6.25. The spread was $4.62 during the previous week. The added $1.63 indicates the growing independence of North American supply and perhaps somewhat greater insulation from foreign events – at least in the short run.
What do the charts say?
There are many technical aspects to the examination of price charts. One of them is that prices may reach a new high in a long series. This was the case with WTI crude oil in August. With news of possible military action in Syria, WTI rallied to $112.24, a new recent high. As the prospect of deferred action, however, WTI prices fell back, closing for the week at $107.76, near the weekly low. This suggests a possible reversal of prices.
Unusually high prices invite contrary action and crude oil producers should consider using the combination of a new high and a lower close as a signal to get short.