Embed Size (px)
Citation preview
1
WTI Crude vs. Brent Crude
Brent crude is familiar term in India. The and most middle-eastern crudes are also which has its origins in the Gulf of Mexico, is the benchcrude on derivative markets. Though twoBrent as the benchmark, the derivative markets never took it seriouscommodity futures exchange, the New York Mercantile Exchange (NYMEX)pressure recently. Its rival, the Intercontinental Exchange (ICE)its acquisition of the International Petroleum the former grabbed higher market share. Though both are light sweet crudeswhich means it should be cheaper. Prior to September 2010, there existed a typical price difference per barrel of between +/-3 USD/bbl compared to WTI and been a significant divergence in price compared to WTI, reaching over $11 a barrel by endBrent crude emerging as the new benchmark contractBrent volumes are still nearly half of WTI trade, share by ICE in the crude markets can be seen as the new emerging trendthis spread to expand.
Origin and Pricing
Major oil producers, including Russia and Nigeriaa benchmark to price the crude they produce. that a little over 20 million barrels of daily oil production are priced using Brent as a benchmark; it is a key crude blend for the European market and, to some extent, for Asia.
In contrast, WTI has historically been more of a U.S. crude oil basket. Not only is it used as the basis for U.S.but it is also a key benchmark for U.S. producWTI more closely reflects U.S. supply/demand fundamentals, while Brent tends to be more influenced by global events and international supply/demand fundamentals.
Of course, traditionally the US and global oil markets have been closely related; the US is, after all, still the world's singleconsumer of crude oil, as well as the largest importer. But right now this traditional relationship has shifted.
WTI Divergence from Brent Crude Oil
One of the most unusual and interesting devin performance between these two most common crude oil benchmarks in the world. Brent crude oil futures are trading at a premium to U.S. WTI, with the price difference between the two having rihigh of over $10. The difference is the biggest ever for the benchmarks, which typically trade within $2 of each other, and raises questions about whether the oftcrude remains an accurate reflection of conditions in the oil market.
Please refer to the important disclaimer on the last page of this report
Commodity Fundas
WTI vs Brent2 February 2011
WTI Crude vs. Brent Crude
The Indian crude-oil basket is typically linked to the Brent crude price, also pegged to Brent crude. But the WTI (West Texas Intermediary),
the Gulf of Mexico, is the benchmark crude for the world since it is the largest traded two-thirds of the world’s internationally traded crude
Brent as the benchmark, the derivative markets never took it seriously. The world's largest physical New York Mercantile Exchange (NYMEX), has been under significant peer
Intercontinental Exchange (ICE), which owns the Brent crude contract since International Petroleum Exchange (IPE) in 2001, is hard on the heels of the NYMEX
grabbed higher market share. Though both are light sweet crudes, Brent is slightly inferior to WTI, which means it should be cheaper. Prior to September 2010, there existed a typical price difference per barrel
3 USD/bbl compared to WTI and OPEC Basket. However since the autumn of 2010 there has been a significant divergence in price compared to WTI, reaching over $11 a barrel by end-January, 2011. Is Brent crude emerging as the new benchmark contract, overtaking the WTI? Volumes do not jus
nearly half of WTI trade, though they are catching up. The rate of increase share by ICE in the crude markets can be seen as the new emerging trend. Besides that, are other reasons for
including Russia and Nigeria, use Brent as the crude they produce. It is estimated
r 20 million barrels of daily oil production are s a key crude blend for
the European market and, to some extent, for Asia.
In contrast, WTI has historically been more of a U.S. crude oil basket. Not only is it used as the basis for U.S.-traded oil futures,
s also a key benchmark for U.S. production. Therefore, WTI more closely reflects U.S. supply/demand fundamentals, while Brent tends to be more influenced by global events and international supply/demand fundamentals.
Of course, traditionally the US and global oil markets have been ated; the US is, after all, still the world's single-largest
consumer of crude oil, as well as the largest importer. But right now this traditional relationship has shifted.
WTI Divergence from Brent Crude Oil
One of the most unusual and interesting developments in the past two months has been the stark divergence in performance between these two most common crude oil benchmarks in the world. Brent crude oil futures
with the price difference between the two having risen to a twohigh of over $10. The difference is the biggest ever for the benchmarks, which typically trade within $2 of each other, and raises questions about whether the oft-quoted Nymex contract for West Texas Intermediate
reflection of conditions in the oil market.
Please refer to the important disclaimer on the last page of this report
Commodity Fundas
WTI vs Brent 2 February 2011
the Brent crude price, pegged to Brent crude. But the WTI (West Texas Intermediary),
is the largest traded ded crude is priced using
. The world's largest physical significant peer
which owns the Brent crude contract since of the NYMEX as
Brent is slightly inferior to WTI, which means it should be cheaper. Prior to September 2010, there existed a typical price difference per barrel
owever since the autumn of 2010 there has January, 2011. Is
t justify that, as he rate of increase in market
are other reasons for
elopments in the past two months has been the stark divergence in performance between these two most common crude oil benchmarks in the world. Brent crude oil futures
sen to a two-year high of over $10. The difference is the biggest ever for the benchmarks, which typically trade within $2 of
quoted Nymex contract for West Texas Intermediate
2
Historically, whenever Brent has traded at a premium, that premium has closed quickly as U.S. refiners start refining more WTI. This reduces demand for Brent and pushes up demand for WTI, putting downward pressure on Brent prices relative to WTI. This is a fancy way of saying that the relationship between Brent and WTI tends to stabilize over time because of simple market forces. In the past, these temporary inversions of the normal WTI/Brent premium have been caused by short-lived supply disruptions.
Recent experience, however, suggests that other factors have entered the equation. There are obviously more forces at work in the crude oil market than just the quality of the crude and refining economics
U.S. Inventories Still High
U.S. crude inventories were well above the five-year average last year and are at the highest level in five years.
The most recent report from the U.S. Energy Information Administration showed crude stocks rose by 4.84 million barrels to 340.57 million barrels in the week to Jan. 21. Demand from the world's biggest consumer was hard hit during the economic recession, and has yet to fully recover.
A deepening of the contango, when frontmonth prices trade at a discount to later months, over the past few weeks could also encourage players to store oil and sell it later at a higher price.
Rising Flows of Canadian Crude to
Increased flows of Canadian crude into the which includes Cushing, Oklahoma, the delivery point for the New York Mercantile Exchange's light sweet crude oil, takes the bulk of Canada's rising crude exports. Rising inventories at Cushing typically weigh on prices for U.S. crude futures. Last week, Cushing inventories rose to 37.7 million barrels, the highest level since August. Refiners, meanwhile, are showing little appetite for amarket now braces for TransCanada Corp.'s Keystone pipeline to come online by March. That pipeline is expected to deliver another 150,000 barrels a day to Cushing. The price of BrenCushing's rising inventories.
COMMODITY FUNDAS
Please refer to the important disclaimer on the last page of this report
-6
-4
-2
0
2
4
6
8
10
12
Brent - WTI Spread
Source: Bloomberg
$/
ba
rre
l
Historically, whenever Brent has traded at a premium, that premium has closed
start refining more WTI. This reduces demand for Brent and pushes up demand for WTI, putting downward pressure on Brent prices relative to WTI. This is a fancy way of saying that the relationship between Brent and WTI tends to stabilize over time
of simple market forces. In the past, these temporary inversions of the normal WTI/Brent premium have been
lived supply disruptions.
Recent experience, however, suggests that other factors have entered the equation.
re forces at work in the crude oil market than just the quality of the crude and refining economics
well above the year average last year and are at the
The most recent report from the U.S. Energy Information Administration showed crude
4.84 million barrels to 340.57 million barrels in the week to Jan. 21. Demand from the world's biggest consumer was hard hit during the economic
A deepening of the contango, when front-month prices trade at a discount to later months, over the past few weeks could also encourage players to store oil and sell it
Rising Flows of Canadian Crude to the Midwest
the U.S. Midwest are also weighing on WTI prices. The Midwest region, the delivery point for the New York Mercantile Exchange's light sweet crude
nada's rising crude exports. Rising inventories at Cushing typically weigh on prices for U.S. crude futures. Last week, Cushing inventories rose to 37.7 million barrels, the highest level since August. Refiners, meanwhile, are showing little appetite for additional crude. U.S. refinery use fell to 81.8% of capacity. market now braces for TransCanada Corp.'s Keystone pipeline to come online by March. That pipeline is expected to deliver another 150,000 barrels a day to Cushing. The price of Brent, on the other hand, is
240,000
260,000
280,000
300,000
320,000
340,000
360,000
380,000
400,000
5Yr High-low range
Actual Inventory
Weekly Crude Oil Inventories As Compared With Five Yr
Avg. And Maximum & Minimum Range
Source: EIA
COMMODITY FUNDAS – WTI VS BRENT
2-Feb-11
disclaimer on the last page of this report
also weighing on WTI prices. The Midwest region, the delivery point for the New York Mercantile Exchange's light sweet crude
nada's rising crude exports. Rising inventories at Cushing typically weigh on prices for U.S. crude futures. Last week, Cushing inventories rose to 37.7 million barrels, the highest level since August. Refiners,
dditional crude. U.S. refinery use fell to 81.8% of capacity. Besides, the market now braces for TransCanada Corp.'s Keystone pipeline to come online by March. That pipeline is expected
t, on the other hand, is not affected by
Average
Crude Oil Inventories As Compared With Five Yr
3
Losing Its Global Reputation
Brent crude, London’s benchmark for about twoglobal marker over WTI, according to the International Energy Agency (IEA). In its latest monthly oil market report the IEA said, “Brent is gaining more acceptance as the global benchmark given its prominent roles as a price link to European, Asian and Middle East crudes.”
Even OPEC has shown concern that WTI may be an inaccurate benchmark. About a year ago Saudi’s Aramco, a fully integrated international petroleum company with the world's largest oil reservesWTI for the Argus Sour Crude Index. According to the Saudis, the Argus was a better reference for the heavier, more sour crude which the country exports.
Last month, Reuters reported Asia is trying to ditch its regional oil benchmarks for Brent crude, stating that Brent is a closer match to the region's light, sweet crude than WTI. This coincides with increased investment fund flows following this month’s re-weighting of commodity indexes towards Brent futures and away from US crude.
Record Open Interest & Volumes
in Brent Futures
Rising purchases of Brent crude contracts have driven holdings of the European benchmark oil grade to the highest level in five months relative to New York futures as investors bet it is a better gauge of global demand.
Open interest, the number of contracts that haven’t been closed or delivered, for Brent futures rose to a record 968,565 last week. Aggregate volumes, which rose only marginally from 2007 to 2009, have risen sharply in Brent futures last year.
COMMODITY FUNDAS
Please refer to the important disclaimer on the last page of this report
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000Volume (lots)
Open Interest (RHS)
Brent futures volume has increased substantially last year, and open interest hit a new record last week
Source: ICE, Bloomberg
Brent crude, London’s benchmark for about two-thirds of global production, may be gaining in prominence global marker over WTI, according to the International Energy Agency (IEA). In its latest monthly oil market report the IEA said, “Brent is gaining more acceptance as the global benchmark given its prominent roles as a
d Middle East crudes.”
Even OPEC has shown concern that WTI may be an inaccurate benchmark. About a year ago Saudi’s Aramco, a fully integrated international petroleum company with the world's largest oil reserves, made a decision to ditch
s Sour Crude Index. According to the Saudis, the Argus was a better reference for the heavier, more sour crude which the country exports.
Last month, Reuters reported Asia is trying to ditch its regional oil benchmarks for Brent crude, stating that Brent is a closer match to the region's light, sweet crude than WTI. This coincides with increased investment fund flows
weighting of commodity indexes towards Brent futures and away from US crude.
Record Open Interest & Volumes
Rising purchases of Brent crude contracts have driven holdings of the European
ighest level in five months relative to New York futures as
s a better gauge of global
of contracts that haven’t been closed or delivered, for Brent futures rose to a record 968,565 last week.
rose only risen
USA Oil Infrastructure
Cushing, Oklahoma
COMMODITY FUNDAS – WTI VS BRENT
2-Feb-11
disclaimer on the last page of this report
0
200000
400000
600000
800000
1000000
1200000
futures volume has increased substantially last year, and open interest hit a new record last week
thirds of global production, may be gaining in prominence as a global marker over WTI, according to the International Energy Agency (IEA). In its latest monthly oil market report the IEA said, “Brent is gaining more acceptance as the global benchmark given its prominent roles as a
Even OPEC has shown concern that WTI may be an inaccurate benchmark. About a year ago Saudi’s Aramco, a made a decision to ditch
s Sour Crude Index. According to the Saudis, the Argus was a better reference for the heavier,
Last month, Reuters reported Asia is trying to ditch its regional oil benchmarks for Brent crude, stating that Brent is a closer match to the region's light, sweet crude than WTI. This coincides with increased investment fund flows
weighting of commodity indexes towards Brent futures and away from US crude.
USA Oil Infrastructure -
Cushing, Oklahoma
COMMODITY FUNDAS – WTI VS BRENT
2-Feb-11
4 Please refer to the important disclaimer on the last page of this report
Investors have also bought Brent because of a premium, or backwardation, on prompt futures relative to later-dated supplies that’s given traders a profit as they roll over their holdings from the first-month into later-delivery contracts. Front- and next-month futures were in uninterrupted backwardation from Dec. 20 to Jan. 17. The Brent curve is very supportive because of the backwardation. That’s why the long positions are getting out of WTI and into Brent.
What All This Means
The gulf between the Nymex and Brent contracts has soared to its widest point ever and is due largely to surging oil supplies from Canada at the Nymex delivery point of Cushing. The spread is likely to remain elevated in the months as the market braces for TransCanada Corp.'s Keystone pipeline to come online by March. This is expected to deliver another 150,000 barrels a day to Cushing.
The widening gap between the two contracts has raised questions about whether WTI crude is an accurate reflection of conditions in the global oil market. Brent is not affected by Cushing's rising inventories and is used as a price marker for refineries in Europe, Asia and elsewhere, better reflecting market conditions. It’s been a long time coming and the market could be bracing for a new benchmark. We believe the gap between the two could narrow from its current record levels, but Brent Crude would maintain a premium over WTI in the months ahead.
AnandRathi Commodities Ltd.,
11th Floor, Times Tower Kamala City, Pandurang Budhkar Marg, Lower Parel, Mumbai – 400013 India
Phone: +91 (22) 4047 7000; +91 (22) 6626 6666
Mail: [email protected]
Kishore Narne Research Head – Commodities [email protected] +91 (22) 6626 6450
Ritesh Gandhi Sr. Analyst – Energy [email protected] +91 (22) 6626 6526
Disclaimers:
This report has been issued by AnandRathi Commodities Limited (ARCL), which is regulated by FMC. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any commodities or any options, futures or other derivatives related to such commodities ("related investments"). ARCL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any commodities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARCL, its affiliates, directors, officers, and employees may have a long or short position in any commodities of this issuer(s) or in related investments. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any commodities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such trades, if any, may fluctuate and that each commodity's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any commodity or related investment mentioned in this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the commodities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report © 2010 AnandRathi Commodities Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of AnandRathi Commodities Limited.
Additional information on recommended securities/instruments is available on request.
