A trader shouts during trading of oil stocks at the New York Mercantile Exchange.
Just which price is the world benchmark for oil these days?
If you ask the folks over at the New York Mercantile Exchange (NYMEX), the answer is West Texas Intermediate (WTI), which is priced at the storage tanks in Cushing Oklahoma, where all expiring NYMEX oil contracts must be settled either through the purchase or sale of physical crude.
But West Texas Intermediate is trading at an all-time discount to other grades of oil. Last week, it was trading at a record $12 per barrel discount to competing European Brent Crude. Until the Egyptian uprising captured the market's attention, the two prices were actually heading in opposite directions with WTI sinking to a two-month low of $85 per barrel, while Brent was within a dollar of triple digits.
The divergence is no mystery. Unlike Brent crude from the North Sea, which can be shipped to refineries pretty much anywhere in the world, oil in storage at Cushing can only be absorbed by refineries in the U.S. Midwest. With nowhere else to go, WTI is not even an accurate barometer for oil prices in the U.S. market, let alone the global market. For example, the price spread between it and Light Louisiana Sweet on the Gulf coast is as big as its spread with Brent. And by all accounts, the spread between WTI and Brent is going to become even bigger, rendering the former increasingly irrelevant as a global pricing benchmark.
It is largely new crude from the Alberta oil sands piling up at Cushing these days, often coming in much faster than local refineries can process it. And within a couple of months, there is going to be another 150,000 barrels a day of Alberta crude coming down Transcanada Corp.'s newly completed arm of its Keystone Pipeline that will connect Cushing with the flow of oil sand crude from Hardisty, Alberta.
Until TransCanada can connect the ever-increasing flow of crude from the oil sands to refineries on the Gulf of Mexico (not likely before 2013), there is going to be a bigger and bigger disconnect between WTI and global crude demand as more oil piles up at Cushing.
As that happens, the oil industry and the investment community will look to Brent as the new benchmark for global oil prices. Soaring purchases of Brent crude contracts have already driven the European oil benchmark to the highest level in five months against NYMEX oil futures contracts as more investors bet it is a better indicator of global demand.
So don't be fooled by bloated inventories of Canadian crude held in storage in the middle of nowhere. Check out the Brent March futures contract if you want to know where world oil prices are trading.
And when you do, you may just find you are already in a world of triple digit oil.
Jeff Rubin