2011 Oil Market Trends

By Robert Sullivan – Exclusive to Oil Investing News

Despite echoes of 2008 earlier in the year when crude oil prices were surging into triple digits, the story of 2011 for oil so far has turned out to be the price spread that has developed between West Texas Intermediate (WTI) and Brent crude.

Brent ($94.80 per barrel) opened the year at a $3 premium to WTI ($91.60 per barrel), but since then the gap has expanded substantially, hitting a record high of $26.21 per barrel on August 19^th.

While both benchmarks hit an upswing beginning in February and peaking in late April that saw WTI at $114.80 per barrel and Brent at $126.90 per barrel, WTI has since retreated under $90 per barrel, where it has sat for the better part of August.

A similar climb-down has not been seen with Brent. Trading at over $112 per barrel as the week opened, Brent is nearly $20 more expensive than it was to begin the year.

Analysts have pointed to a myriad of supply issues that have kept the price of Brent crude high, including the conflict in Libya, ongoing maintenance at installations in the North Sea, and disruptions due to sabotage in Nigeria.

In contrast, a glut of supply in Cushing, Oklahoma – traditional settling point for WTI on the New York Mercantile Exchange (NYMEX) – has dragged the price of WTI back down by almost 30 percent. With nearly 400,000 barrels per day now coming out of the Bakken shale, and an increase in imports of oil from Canada, stocks at Cushing hit a record high of 41.9 million barrels in April. And although a recent inventory report by the US Energy Information Agency (EIA) revealed that stocks at Cushing had dipped to 36 million barrels by the beginning of August, some analysts remained unconvinced that this was indicative of a reversal in the US oversupply.

“Long-term the US Midcontinent just has a huge problem, and that is too much oil coming in, not enough going out, and not enough demand,” commented oil economist Phil Verleger in a recent interview.

The widening WTI-Brent spread has also sharpened a debate which began in earnest after a 2007 report by Lehman Brothers Inc. on whether WTI is still relevant as a benchmark for the international oil market.

A recent piece by Elliot Gue of Investing Daily argues that the old dynamic of the US driving international oil markets is becoming irrelevant as emerging markets take on a larger role in the global economy.

“You can’t analyze the global oil market by parsing weekly changes in US inventories”, explains Gue. “Rising oil consumption in China, India and other emerging markets continue to tighten the supply-demand balance.”

Gue and others argue that this tight supply-demand balance is better reflected by the Brent benchmark, and believe investors should look to producers with exposure to Brent crude oil.