Is Brent Crude What the Rest of The World Uses & CL What North America Uses?

Discussion in 'Commodity Futures' started by Bear Plunger, Jan 20, 2009.

  1. Can someone explain to me the significance of the Brent index?
  2. fyshy

    fyshy Guest

    asia uses dubai benchmark
  3. I'm UK based, but I'd have to say WTI is THE benchmark that the world pays attention to, though people are noticing it's faults given the massive discount it is trading at the moment what with the limitation of Cushing's storage.

    Generally physical markets, though OTC, will have an agreed benchmark to base their prices off of. I think this generally depends on location. So a barge of 10ppm Gas Oil coming out of ARA will be priced at a premium or discount to the ICE Gas Oil price when the deal is done, and a cargo of crude out of Houston will be priced at a discount / premium to the WTI.

    So when it comes to crude, with the States being such a massive user, it's hard to ignore the significance of the WTI as a global benchmark, and Brent more limited to being classed as a 'European benchmark'.

    Any other views?
  4. WTI is the benchmark used by the media to present the international price of a crude oil barrel. This international indicator shows the price in dollars per barrel being useful as a reference to all the crude oils traded in the western hemisphere, having a direct impact in the price of all type of crude oils and its refined and petrochemical products all over the world, as well as in the price of the natural gas in North America.

    The WTI market is characterized by a large number of independent producers, from large petroleum companies to common citizens, who sell about 400 thousand barrels of crude oil to gatherers based on posted price in the market, on a daily basis.

    This volume is only the 2% of the United States crude oil demand and it goes to the local market, exclusively, having nothing to do with the requirements and changes of the international market. Perhaps its only relationship with the external world is when it turns into a competitor of the imported crude oils that arrive to the United States Gulf Coast and that are processed by the same refineries which buy the WTI. However, this competition is restricted by the capacity of the pipelines that transport such crude oils.

    Despite its relative small volume, non-open competition and non-pressure supply-demand that affect the main American crude oils, the WTI has wide repercussion in the international market because it was chosen by the New York Mercantile Exchange (NYMEX), in 1983, as a benchmark for its light sweet futures contracts.

    The WTI was chosen by the NYMEX for several reasons. First, it is a very light crude oil (36° API) with a low sulfur percentage allowing it to be processed in any type of refinery, without using high technology units, turning it into a very popular crude.

    The Brent crude oil is traded in the Intercontinental Exchange (ICE), based in Atlanta-London. This crude oil comes from the North Sea and is totally exposed to the international market since it is acquired by many European and Eastern United States refineries. Brent and WTI are of similar quality.

    Perhaps it is so important because is the benchmark of Middle East and West Africa, which produce almost the third part of the crude oil in the world. Amid these advantages, a great weakness appears: it belongs to quite a few owners.

    The WTI is financially powerful while Brent remains the dominant benchmark for physical crude oil trading. The WTI is limited to the market conditions inside of the United States, whereas the Brent, in the middle of the sea, is open to world requirements.

    Thus, the differential between both, WTI and Brent crude oils comes up as a huge analysis and decision-making tool. Through this differential it is possible to discover the moment in which WTI is “disconnected” of the international market that occurs when the crude oil inventories inside the United States are far from the historical levels. When they are very low, the WTI price shoots up, increasing its differential with the Brent. When the opposite occurs, the WTI weakens even reaching prices lower than Brent.

  5. I don't think anyone could improve on that. Great post Rubibond007!!
  6. And right now, are we in this sate of disconnect? Is the spread between the two widening.

    Also, if you can talk briefly about the contango between CL contracts - and how is that trend going right now? I haven't been following it.
  7. Spreads between the two are narrowing. It's just shot up to -2.00, I think the March April WTI is pulling it in. Feb March yesterday finished strongly, so I guess this is a continuation of that.
  8. Good Morning all.

    The February and March crude futures converged on expiration day, with the gap between the two shrinking from $6.43 to $2.70-$2,10 ( the narrowest spread between the front-month and second-month contracts in six weeks). The market had bet that the spread would widen in the final days of the February contract, similar to what occurred with the January contract, which expired at an $US8.49 discount to February. When the spread began to narrow last Friday, traders bought February crude and sold March to extract themselves from the bad bets.

    Even at $3.41, the March-April spread would have been considered extremely rare before last month, when concern about rising oil inventories took hold. The market is likely to remain in a state of deep contango until demand halts its decline, we probably could see that spread drift toward $5-6 again. When the market is in a contango state, then we (futures traders) will/can lose money on the rollover.

    BTW: With WTI prices below Brent levels, US refiners are going to have trouble finding any oil to import, better oil prices are available internationally than in the US. Of course, there are certain oil supplies such as Venezuelan heavy crude that are relatively captive to the US market. However, with WTI prices so far under international levels, it will be tough for the US to attract additional barrels. This will have a effect sooner or later. (inventories levels)

    Have to go guys, Nice trading day.