Could the Spread Between Brent and WTI Skyrocket Fueled by Egypt Events?
Events in Egypt and the potential for this unrest to overflow to the neighboring regions sparked a disturbance among commodity analysts. A lot of analysts kindly added fuel to the public speculations that energy markets were facing a tremendous blow. Some of them were seeing the danger resulting from cuts in oil production in the Middle East. Others prophesized the shutdown of the main transportation artery, the Suez Canal. This water passage, while governed by the international treaty, Constantinople Convention of the Suez Canal mandating the use of the water passage “in time of war as in time of peace, by every vessel of commerce or of war, without distinction of flag” is still geographically located in Egypt, and who knows…
Yet, now with the conflict almost resolved, we can look back and try to find out whether all that commotion was justified.
I am not a political analyst and would not dare to go into the guesswork and to take sides in this area. I am a technical analyst, who has been fortunate to have an access to the whole expanse of market data through the ZE’s software ZEMA, allowing me to run historical analysis. Which I do.
One of the market indicators supposedly being driven by Egyptian tensions is a deepening gap between Brent and WTI oil prices. To verify whether all those speculations about the impact were well-grounded, let’s look at the WTI and Brent spot prices, as well as differentials between them from 1987 till now:
Until 2006, WTI and Brent benchmarks were moving quite close to each other, hardly ever parting by more than US$3/Bbl. What happened between 2006 and now? Let’s leave this discussion for later postings… but for now, let’s look at the last three months’ prices, spot, as well as near-month futures.
Surely, the spread reached about US$14/Bbl since the beginning of escalation. However, it started to depart from the usual $3 level in the beginning of January, 2011. It looks like this spread has been receiving contribution from both benchmarks. This leads us to believe that there were other drivers besides Egypt events. To see what actually created similar gaps in the past, we have to look back. Was it USD exchange rate, inventory levels, production, speculation, or geopolitical pressure? Look for the next postings.
(Written with contribution from Vera Tikhomolova).
The author once again has surfaced very timely and interesting comments on crude oil price differentials. Not surprisingly she also tempts us to return for more detailed explanations. The return visit to the site will be worthwhile. The spread between Brent and WTI historically remained around $3 until September 2010 when the spread began its dramatic divergence which remains in evidence to this time. While some works have been released about the reasons for the continued divergence; little has yet to surface in the industry suggesting a solidified opinion as to the cause.
Ms. Gorstenko quite correctly suggests there may be multiple reasons which could most certainly include geopolitics, the growing depletion of the North Sea fields (which I worked on in the mid-1980’s) and the global economic situation. It might be interesting to look beyond the differential between these two most common bench mark crudes – which in reality stem from reasonably stable geo/economic regions; and see if statistically meaningful analysis can be made from differentials between the OPEC Reference Basket or Arab Super Light or even Urals/Mediterranean against Brent/WTI. These spot prices stem from areas perhaps more influenced by recent geopolitical events (while less so for Urals) and may offer interesting analysis. As always is the case Ms. Gorstenko’s work is timely and on topic given the events that continue to unfold in Asia and the Middle East.