Oil prices: Why is West Texas out of whack with Brent?

Oil prices in the Midwest are far lower than in Europe. Why? Pipelines.

By , Guest blogger

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    In the last two months, West Texas and Brent oil prices have diverged.
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As regular readers may recall, I am intrigued when prices deviate from normal relationships (see, e.g., previous posts on oil vs. natural gas prices and the pricing of Citigroup securities).

Over the past couple of months, a new anomaly has emerged: crude oil quoted at Brent has become much more expensive than WTI, the usual price benchmark quoted in the United States.

Over at the Oil Drum, Gail the Actuary illustrates the price disparity: (See chart above).

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And explains it:

We have all heard at least a partial explanation as to why West Texas Intermediate (WTI) and Brent prices are so far apart. We have been told that the Midwest is oversupplied because of all of the Canadian imports, and the crude oil cannot get down as far as the Gulf Coast, because while there is pipeline capacity to the Midwest, there isn’t adequate pipeline capacity to the Gulf Coast. I have done a little research and tried to add some more context and details. For example, the opening of two pipelines from Canada (one on April 1, 2010 and one on February 8, 2011) seems to be contributing to the problem, as is rising North Dakota oil production.

There are two pipelines (Seaway – 430,000 barrels a day capacity and Capline – 1.2 million barrels a day capacity) bringing oil up from the Gulf to the Midwest. It is really the conflict between the oil coming up from the Gulf and the oil from the North that is leading to excessive crude oil supply for Midwest refineries and the resulting lower price for WTI crude oil at Cushing. Demand for output from the refineries remains high though, so prices for refined products remains high, even as prices for crude oil are low. This mismatch provides an opportunity for refiners to make high profits.

Her whole post is well worth reading if you are into such things.

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