IF YOU DON'T LIKE THE WAY THE GAME IS GOING … MOVE THE GOAL POSTS, CHANGE THE FORMULA FOR CALCULATION AND BLAME THE OTHER GUY … WHAT A WONDERFUL WORLD WE LIVE IN! WE ELECT THESE CLOWNS AND THE ONLY ONES LAUGHING ARE THE HABERDASHERS SELLING THE COSTUMES, FUNNY NOSES AND PAINT.
US Energy Agency Adopts Brent, Drops US Crude … SURE ARE A LOT OF MOVING PARTS IN THE SLIPPERY OIL MARKET
Published: Friday, 7 Dec 2012 | 5:13 AM
The U.S. government's energy agency has adopted North Sea Brent crude as its benchmark for oil forecasts, dropping its domestic benchmark, saying it no longer reflects the price paid for oil by U.S. refineries.
The Energy Information Administration (EIA) said in its annual energy outlook it was abandoning West Texas Intermediate (WTI), traded on the New York Mercantile Exchange , and switching to Brent on the Inter Continental Exchange (ICE).
The move by the U.S. Department of Energy's energy forecaster reflects a migration of large parts of the oil market to Brent and away from WTI over the last year.
"This change was made to better reflect the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent," the EIA outlook said.
The agency said WTI prices had "diverged from other benchmark crude prices because of insufficient pipeline capacity to move crude oil to and from Cushing, Oklahoma", the location at which WTI prices are quoted.
The EIA said the growth of U.S. and Canadian oil production had helped overwhelm the transportation infrastructure needed to move crude from Cushing to the U.S. Gulf of Mexico.
Brent is becoming the hedge of choice for big investors, even for U.S. companies, and the volume of Brent futures and options has soared, boosting liquidity at the expense of the U.S. crude.
The landlocked nature of WTI led the world's biggest oil exporter, Saudi Arabia, to drop the U.S. crude as the basis for U.S. sales in favor of a basket of Gulf of Mexico crudes.
The widely followed S&P GSCI index marks this change on Jan. 1, raising its weighting for Brent and cutting WTI, following a migration by major oil producers and consumers.
The Energy Information Administration (EIA) said in its annual energy outlook it was abandoning West Texas Intermediate (WTI), traded on the New York Mercantile Exchange , and switching to Brent on the Inter Continental Exchange (ICE).
The move by the U.S. Department of Energy's energy forecaster reflects a migration of large parts of the oil market to Brent and away from WTI over the last year.
"This change was made to better reflect the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent," the EIA outlook said.
The agency said WTI prices had "diverged from other benchmark crude prices because of insufficient pipeline capacity to move crude oil to and from Cushing, Oklahoma", the location at which WTI prices are quoted.
The EIA said the growth of U.S. and Canadian oil production had helped overwhelm the transportation infrastructure needed to move crude from Cushing to the U.S. Gulf of Mexico.
Brent is becoming the hedge of choice for big investors, even for U.S. companies, and the volume of Brent futures and options has soared, boosting liquidity at the expense of the U.S. crude.
The landlocked nature of WTI led the world's biggest oil exporter, Saudi Arabia, to drop the U.S. crude as the basis for U.S. sales in favor of a basket of Gulf of Mexico crudes.
The widely followed S&P GSCI index marks this change on Jan. 1, raising its weighting for Brent and cutting WTI, following a migration by major oil producers and consumers.
WTI's structural shift
Source:Petroleum Economist. (Mar. 2012):
Document Type:Article
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Dont write off the US, its oil benchmark, or its currency just yet. The countrys role in the global oil market, said since 2007 to be losing its significance, will be decisive again, says Derek Brower
FOR NOW, in the battle of the crude-oil benchmarks, Brent is winning. Traders are flocking from Nymex, home of WTI, to Intercontinental Exchange (Ice), the platform for the surging Brent contract. Brent, against which about two-thirds of the worlds oil is priced, reflects whats happening in global oil markets, runs the argument. WTIs role as a barometer is over.
Thats certainly true for now. Last years war in Libya, which took 1.6 million barrels a day (b/d) out of the quality end of the crude market, pushed up Brent, giving it a solid premium over WTI. And approaching sanctions on Iran; the loss of South Sudanese crudeamid a spat with Sudan; and even a cold snap in Europe all factors directly affecting the balance of supply for the world beyond US borders have injected more strength into the contract.
The backwardation in Brents forward curve futures prices lower than prompt suggesting geopolitical risk and tightness now, with an easing later in the year, reflects data from forecasters, which see Opec supply exceeding the call on its crude in the coming quarters, and a moderation of global demand growth, including in Asia. If you want a snapshot of how the market views the supply/demand balance, Brent provides it.
WTI, by contrast, has left the reservation. The growing glut of crude in Cushing, Oklahoma, as rising US and Canadian deliveries meet an infrastructural bottleneck, preventing volumes reaching refineries on the Gulf coast, has stranded the USbenchmark.
Dont get carried away
But WTI isnt dead yet. And other forces now at play in the US oil sector suggest its recovery as a benchmark, while not imminent, remains likely. Despite the infrastructural problems at Cushing, the US remains the most liquid oil market in the world and its consumers the most responsive to the fundamentals of supply and demand.
Brents futures contracts have become a haven for speculators money managers and funds that have been big recipients of the quantitative easing programmes launched by central banks since 2008. Ice, like equity markets, has become the hunting ground for investors seeking yields that have disappeared elsewhere.
Oil subsidies in many big Asian and Middle East markets, meanwhile, or fuel taxes in Europe, hardly make Brent, which sets the price of these countries imports, a reliable gauge of an inflated markets affect on demand in the real economy.
Thats not the case in the US, which in the coming months could be Brents Achilles heel. WTI is still the headline oil price quoted on CNBC and in North Americas financial pages. But Brent, and its 20% premium to WTI, is the one that matters for most of the economy. For the most part, Americans will pay prices that reflect the supply/demand balance in Asia or the Middle East not the demand erosion and glut of crude that prevail in their own country. With the exception of the few refiners that can tap Cushings lake of oil, or the mainline of super-cheap synthetic crude arriving from Canada, most processors are buying Brent-priced feedstock.
Padd1, the US northeast, for example, is exposed not to cheap WTI, but to pricey Brent. With about half of that regions refinery capacity down, that means expensive products imports in one of the countrys most populous regions. At the same time, the demise of Petroplus in Europe leaves fewer barrels available for import there. This is likely to make gasoline prices, already at their highest average ever for this time of the year, still more expensive in the northeast.
But with gasoline prices averaging $3.52 a gallon, US consumption is falling sharply. Demand wanes at $3.30/USG and falls at $3.50/USG, says Stephen Schork, editor of oil market newsletter The Schork Report. We will soon see gasoline well above $4/USG in the northeast. Schork expects a price spike as traders rent floating storage in New York harbour, waiting to sell at inflated prices, before a drop later in the year.
Thats a Brent problem, feeding directly into the US, and it could play havoc with the market. As US oil demand contracts on 15 February, Bloomberg quoted MasterCard analysis showing the countrys drivers consumed 8 million b/d of gasoline last week, a fall of 3.1% from the week before and 5.3% beneath the same week last year oil prices will continue to squeeze consumers.
These problems may be short-lived. As the US approaches the summer driving season, the White House aware that soaring gasoline prices will hinder President Barack Obamas re-election bid will probably consider a politically engineered release from the Strategic Petroleum Reserve, perhaps using sanctions against Iran as a reason.
Products will eventually find their way from the Gulf, the Rockies or the Midwest, to whichever region like the northeast can offer the best price. The reversal of the Seaway pipeline, allowing some of the stockpile in Cushing to reach refineries in the Gulf, should allow more barrels of cheaper WTI into the market. Petropluss administrators, meanwhile, have agreed to bring its UK refinery back on-line, until a long-term buyer is found. These factors should eventually narrow Brents premium to WTI.
Brent may also run into problems. The coming quarters should see Opec pumping way above demand for its oil, not least on the back of Libyas swift production recovery. The end of North Sea maintenance that has constrained some supplies will lift non-Opec production. Chinas chances of avoiding a hard landing look smaller than before, if recent export and import data offer a useful guide. Irans customers are already finding ways around impending sanctions, not least with the help of Saudi Arabia. And, anyway, the market has known about Iran since November: any impact is already priced in.
But above all, US fundamentals should come to the fore. As demand shrinks, supplies are still climbing. Notwithstanding near-term infrastructural constraints, the Bakken bonanza, which is behind sharply rising production, could be as disruptive to the oil market as the US shale-gas boom has been to the global natural-gas outlook.
The Energy Information Administration (EIA) says US output, reversing a decline that began in 1986, will hit 6.7 million b/d by 2020. Even excluding proposed improvements on fuel standards, which would dampen oil consumption further, production growth will see import dependence fall from about 50% in 2010 to 36% in 2035.
A nexus of global oil trade
If a variation of the Keystone XL pipeline from Canadas oil sands to the US is approved after the presidential election this year, as many analysts expect, the US will also have more cheap Canadian oil arriving. And when oil-sands exports from the Pacific coast to Asia eventually begin, Cushing will become a genuine nexus of global oil trade again, with prices dictating whether oil arrives in Oklahoma, or Shanghai. That should one day restore WTI as a global benchmark.
Rising US oil production will also underpin its own petroleum exports. At 3.2 million (gross) b/d in November, exports have hit a record high, says the EIA, more than doubling in five years. The petroleum export-import balance is still deep in the red, but the improvement in the US current-account deficit heavily affected by the $300 billion or so a year the country has been spending on oil imports will also support the dollar. And as the dollar rises, global oil prices will retreat.
So dont write off the US, or WTI just yet. The worlds biggest oil market is balancing itself: supplies are rising and demand is falling. The infrastructural problems in Cushing wont last forever.
Brent may be hitting American drivers hard. But as they ration their demand, US consumers are reacting just as profoundly as the countrys ingenious indigenous producers, delivering a decisive structural shift in the worlds biggest and most dynamic oil market.
Source Citation (MLA 7th Edition)
"WTI's structural shift." Petroleum Economist Mar. 2012. General OneFile. Web. 23 Feb. 2013.
