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.


  1. If we could export WTI to Europe to substitute for Brent Crude wouldn't that have the effect of raising the price of WTI? In this case would a pipeline from Cushing OK to Europe (or the east coast) actually increase prices in the US market?

  2. Richard - yes. Slate, among others, have been writing about this. When the Cushing glut goes away gas prices in the middle of the country will go up .
    As to why the arb isn't going away-you can't just reverse the direction of a pipe very quickly. For whatever reason there are two many pipes leading into Cushing and not enough leading out. Some of these pipes are in the process of being flipped, which will reduce the spread. In addition the part of Keystone that is being built (from Cushing to GoM) will have the same effect. Just takes a while.

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