Price disparity exists despite overall decline in current crude oil prices

There has been a general decline in crude prices since March this year; yet a widening price disparity has been observed between West Texas Intermediate (WTI) and its global counterpart, Brent Crude.  Both are of the typical light, sweet crude variety, but WTI sells at a crude oil price per barrel of $84, while Brent at $97 pb.

Issues on proximity of WTI supply to oil refineries are one reason for such price difference. Oil refineries, especially in the Gulf Coast, are having difficulty obtaining large volumes of WTI. Pipeline infrastructures that are supposed to transport crude to refineries are under-capacity, though expansion is being worked at. Thus, even if WTI is cheaper than shale gas, companies are constrained to favor the latter, which is more accessible and in plentiful abundance in states like N. Dakota, Oklahoma, and Texas. The glut created by shale gas producers has also pushed WTI crude oil prices to lower levels.

The wide price gap has lingered unexpectedly. For the past two decades, the difference in WTI and Brent crude was no more than a dollar. But things have started to change drastically in February 2011. Price differences soared to as high as $20 as the crisis in the Middle East triggered increases in local oil production to buffer any supply cuts. In October of the same year, the crude oil price gap reached a hefty $27. Around that time, WTI was trading at $87 while Brent was at $114.  Presently, the spread is around $13.

Nowadays, the oil market is speculating about the price gaps, specifically, whether it’s going to narrow in the months until year-end.  David Greely, Analyst from Goldman Sachs, said the price of WTI would close in on Brent price, probably $5 below Brent. Greely cited that the Seaway pipeline reversal project will help Gulf Coast refineries have sizable amounts of the locally produced crude.

Others believe that the gaps will stay within the double-digit range. Oppenheimer Analyst Fadel Gheit predicts the spread will contract to a range of $8 to $12, with WTI prices still below that of Brent.

Oil rig stats show that the number of rigs in operation has gone up, from 984 rigs in June last year to 1,400 this June. The growth represents a more than 40 percent surge. This means there’s going to be excess supply of oil, and that this will somehow put a cap on the WTI crude oil price per barrel.

For some traders, the WTI-Brent price gaps offers good prospects to earn income by buying local oil at cheap prices, transporting them to Gulf Coast refineries through leased barges or railway systems and eventually selling them to Gulf Coast refineries at higher prices. Of course, a narrowing spread makes it more difficult to earn marginal incomes but still, the current $13 gap presents a good opportunity.