For all of the bearish headlines espousing the sharp drop in the price of crude oil, you’d be forgiven for missing the move if you were anywhere outside of North America. While West Texas Intermediate crude (NYMEX:CLF14) is on pace for its third consecutive monthly decline, which would be the longest losing stretch in nearly five years, its trans-Atlantic cousin, Brent crude, is flirting with its highs (Chart 1).
The declining relevance of WTI as a benchmark for global crude trade is being reflected in the weightings of the largest commodity price indexes, the most energy intensive of which is the Goldman Sachs Commodity Index. The S&P GSCI is weighted based on global trade, and has the largest pool of assets tracking its performance. For 2014, S&P has announced that it will increase the weighting of Brent crude to 23.14%, while reducing the weighting of WTI to 23.73%. To provide some context, back in 2008 WTI represented over 40% of the index, and Brent a mere 14.7%.
As discussed in previous Focus on Futures, the divergence in prices is driven primarily by a confluence of ever-expanding domestic production in the United States, a mismatch of pipeline and storage infrastructure relative to the sources of new production leading to bottlenecks, and refining capacity running near its limit. Together, these forces have conspired to drive an ever-widening gap between WTI and Brent crude prices.