Tuesday, February 28, 2012
Why doesn't arbitrage bring these prices together?
Historically, West Texas Intermediate trades at about a $2 premium relative to North Sea Brent Crude due to lower sulfur content and higher API. However, BRENT has gradually climbed above the price of WTI due to the political unrest in the Middle East (particularly in Libya) which has decreased supply of "sweet" low sulfur oil to Europe.
Which raises the immediate question, why don't producers ship oil from Texas to Europe and the East Coast Refineries that use Brent? Presumably because there aren't enough pipelines.
This highlights a theme that the Republicans are using to criticize President Obama: that the general aversion to oil and gas (represented by the President's opposition to the Keystone pipeline) has pushed up the price of oil by making the markets less competitive. In this context, less competitive means that supply from Texas is having a difficult time reaching the East Coast.