The price of WTI vaulted 3.3% this week. The catalyst being that on Wednesday, Enbridge said it would buy a 50% stake in a pipeline that
brings oil from the Gulf of Mexico to Cushing, Okla., and reverse the direction
that the oil is pumped, so that oil would be leaving Oklahoma instead of
arriving. That will ease the glut of crude oil, known as West Texas Intermediate
crude, or WTI, stored at Cushing—a glut that has been keeping the price of WTI
far below that of Brent, the European standard.
What was even more noticeable was that the price of other world oil benchmarks did not budge. Brent crude actually retreated on price. The "correlation" between the two crudes—their tendency to move in the same
direction—has averaged 0.96 over the past two decades, just slightly below a
perfect correlation of 1.0. On Nov. 15, it had fallen to 0.71, the lowest in at
least 20 years.
Refiners in the US Midwest had been benefiting from the price of lower WTI Cushing prices and enjoying large crack spread margins. On Wednesday Midwest refiners faced a new world of a tightening spread between WTI and Brent. Marathon was one of several refiners whose stock sold off 5% on this new dynamic.
The global event pricing pressures that have been lifting Brent higher, have begun to retreat. Libyan crude production is coming back on line faster than forecasted, European GDP growth is slowing more than expected and Israeli/Iranian discord seems to playing itself out in rhetoric rather than rockets.
This might not be the best time to bet that the "spread" between WTI and Brent
will widen, however. The difference between the two has dropped already to about
$9 a barrel on Nov. 15 from about $25 in mid-October. While some strategists see
the spread narrowing even further—Goldman Sachs, for
one, expects it to shrink to $6.50 during the next six months—the move likely
won't be in a straight line. The best bet: Wait for the spread to widen before
placing such a trade, or avoid it entirely.
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