Traders are therefore left with two distinct crude markets, driven by their own respective fundamentals. Brent crude, the clear benchmark for global crude oil prices, reflects geopolitical factors such as Iranian nuclear negotiations, difficulties with Libyan production, and myriad other “surprises” that maintain a risk premium in global crude prices. WTI, meanwhile, is relatively immune to such influences, and is driven primarily by domestic supplies, particularly at the Cushing hub – the delivery point for WTI futures contracts.
Despite the complex relationships between these benchmark prices, the driver behind the spread itself is deceptively simple. Chart 2 shows the WTI-Brent spread overlaid against the crude stocks held at Cushing, Oklahoma. The correlation is stark, and easy to understand, since expanding supplies in Cushing are symptomatic of the larger problem of moving crude oil from where production is growing (such as in the Bakken shale, Chart 3) to where it is used, namely the U.S. Gulf coast. In that light, what will move the prices closer together is exactly what moves crude itself, pipelines.
The brief tightening of the spread over this past summer, and the corresponding drop in supplies held in Cushing, was a direct result of increased rail transportation of crude oil, as well as an expansion of the Seaway Pipeline capacity. The Seaway Pipeline runs from Houston, Texas to Cushing, Oklahoma, traditionally carrying crude from the Gulf into the oil trading hub of Cushing.