Oil is priced in a global market, right? Differences in regional prices are small, right? That is conventional wisdom. But prices at West Texas Intermediate and Brent are challenging our understanding of oil pricing.
Yesterday West Texas Intermediate spot price was $84.81, while Brent was $102.33. The price spread reached nearly $18.
A year ago WTI was $74.13 and Brent $71.64: a price spread of less than $3. Price spreads in that range were the historic norm.
The WTI and Brent price signals are flashing different futures.
Brent indicates a growing global economy, with supply stretching to meet demand, plus a bit of nervousness about political uprisings affecting oil production.
WTI portends near zero growth rates, with supply easily meeting demand, and almost no geopolitical risk.
Both cannot be right. Or could they be?
Perhaps they are signaling a new world, where oil is less valuable in North America? Many have predicted that US demand for oil peaked in 2007 and will inexorably decline as efficiency and substitutes cut demand and eat oil's market share.
In addition the shale drilling techniques that have created a glut of gas are increasing US oil production, and Canadian tar sand oil production seemingly has but one major market: US consumers.
So is the Brent or WTI price a more "accurate" indicator of the future? Or will both prices be as different as they are now in the coming years? Thoughts are very welcome.