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09 junio 2007

Spread entre Brent y Texas en máximos, por atasco en Cushing

The crude market may be trying to tell us something, and here's the biggest hint: The price difference between crude traded on the New York Mercantile Exchange and the IntercontinentalExchange has touched its widest level ever.

Despite concerns over tight-gasoline supplies and production uncertainties related to the Middle East and Nigeria, crude futures on Nymex fell almost 5% during the month of May, with the July contract unable to climb past $68 a barrel.

But prices for July Brent crude climbed as high as $71.80 that month.

"There has never been a time in history when the spread has been as wide as it is now," said Bernard Picchi, a senior managing director at Wall Street Access.

Normally, Brent crude costs $1-$2 less than WTI crude, according to James Williams, an economist at WTRG Economics. At its peak, the price spread between the two topped $5, according to his data.

The price differences could imply that either Nymex crude, also known as West Texas Intermediate light, sweet crude, is undervalued, or Brent crude traded in London is overvalued. Which is it?

WTI's faults

WTI usually trades at a premium to Brent "because of the slightly higher quality, and the extra journey" oil tankers have to take to get the oil to the U.S., according to Amanda Lee, a strategist at Deutsche Bank.

So "WTI minus dated Brent should be roughly equal to the freight rate," she said.
Indeed, "crude-oil prices usually depend on two things: quality and location," said Williams. "The greater the distance from the major exporters, the greater the price."

Brent and WTI at Cushing, Okla., are really of similar quality, he said. But Brent has traded at discount to similar crude in the U.S. because oil from the Middle East or Africa costs less to ship to Europe than it does to the U.S.

So the price spread saw pressure from both sides, with geopolitics supporting Brent and the inventory overhang at Cushing, the delivery point for the Nymex contract, "punish[ing]" WTI, Lee said.

"The problem is that Cushing is landlocked, and when some major refineries that buy their oil from Cushing went down, the crude oil started to back up," explained Phil Flynn, a senior analyst at Alaron Trading.

The situation was exacerbated by the contango in the futures market, a situation where prices for the more distant futures contracts exceed spot prices.

"With prices higher out in the later future-contract months, it paid for many speculators to buy oil and deliver it in later months which, in turn, tied up storage space at Cushing," and prices became depressed, said Flynn.

So because of some refining outages and landlocked oil at Cushing, "there are so many historical relationships that are out of whack," he said.

At the same time, Brent was more responsive to geopolitical tensions in the Middle East and Africa than WTI, according to Thorsten Fischer, senior economic adviser for the Royal Bank of Scotland Group.

Also, with U.S. demand growth for gasoline robust, the U.S. continues to import European gasoline cargoes to meet demand, thereby driving gasoline prices higher in Europe, which then supports European crude, he said.

Global following

As far as which type of crude is truly the global benchmark, experts disagreed.
Alaron's Flynn was quick to point out: "Nymex crude is out of whack with the realities of global demand" and "Brent crude is more of a reflection of worldwide demand right now."

Matthew Parry, an economist at Moody's Economy.com, agreed. "Brent tends to more accurately reflect 'true market' conditions," and is "probably the slightly more widely accepted."


"WTI sometimes seems a little pre-occupied with the weekly U.S. stock [supply] numbers," he said.

But Darin Newsom, an analyst at Omaha, Neb.-based DTN, said that with the U.S. pegged as the world's top oil-consuming and importing nation, "it may be the Nymex market that better reflects world supply and demand."

True, "WTI reflects an important portion of global demand growth, namely demand growth in the U.S," said Fischer. But Brent is still more of a global benchmark, he said.

And John Person, president of NationalFutures.com, said that Nymex crude reflects U.S. demand, not really the realities of global demand. It's just one of the Organization of the Petroleum Exporting Countries' basket of seven different grades of oil, he said.

All told, the WTI and Brent contracts actually "reflect underlying local conditions," said John Kilduff, an analyst at Man Financial. Nymex crude is lower because of the "overwhelming supply in the USA refining corridor," while production concerns in Europe and Africa have inflated Brent.

Either way, few expect the wide price spread to last much longer.

Opportunity knocks, or not

"There are certainly profit opportunities here, but they are not risk free," warned Fischer.
"Investors can bet on a widening or narrowing spread, he said. He points out that a WTI-Brent bullet swap is trading on Nymex.

The WTI-Brent spread is a widely used transaction by energy-market traders, according to Nymex. Read more about it.

"For those who have been trading the spread between Brent and WTI, and doing it correctly, money has been made," said Newsom.

But what, exactly, is safer to assume in a market like this?

The run up in gasoline prices is something the energy market has seen before, but it's unlike other times in the past "mainly because of what hasn't rallied with it" -- WTI crude, said Flynn.

The gasoline crack, the amount a refiner gets for turning crude into gasoline, has touched record highs so you'd think that refiners would pay a hefty price to get their hands on that light, sweet crude, he said.

"We would expect to see [WTI] crude oil trading in the $70 range," he said. July crude closed Thursday around $64.01, while Brent crude trades above $68.

The biggest reason for the discrepancy is that landlocked crude at Cushing, said Flynn. "As time goes on, the backlog in Cushing should start to work itself out .... [and] with gasoline demand hanging tough with prices already near all-time highs, the demand for the sweet crude should reappear."

After all, "Brent is lower quality and selling at higher prices. That tells you that higher-quality WTI is undervalued," he said.

So "as refiners start to come on line, the truth will become known that the sweet crude is undervalued," he said. "In fact, due to worldwide demand, I think the sweet crude is the most undervalued commodity on the board."

On a technical level, Newsom points out that "a sell signal may be set to occur on the long-term continuous monthly chart" in the Brent market. "A trader might try to use this as an opportunity to put the spread on the opposite way [long WTI/short Bent] to try to take advantage of the spread moving to a more 'normal' price relationship," he said.

The current wide spread is "unsustainable," according to Deutsche Bank's Lee, though she admits that it is difficult to predict where it'll go next in the short term.

"The market can stay irrational longer than you can stay liquid," according to Adam Sieminski, Deutsche Bank's chief energy economist, who says that this well-worn advice has to be relearned from time to time.

"The problem is really in Cushing with WTI -- [there's] just too much crude there and the answer is likely to be found in some new pipeline projects, and a lot of small fixes to the crude slates at mid-continent refineries," he said.

Lee recommends avoiding "the front-end [contracts] and prefer to position ourselves in the longer-dated [contracts] and hedge the spread with a long position in WTI contango."

Of course, there's an even more subtle investment implication visible here, according to Wall Street Access' Picchi.

"Nearly every oil analyst begins his or her financial models with a forecast of WTI -- and then applies discounts to that benchmark vs. Brent," he said. "Now we have to add premiums."

"That means that most analysts' forecasts of earnings and cash flow for most international oil-producing companies are too low," Picchi explained. "So the stocks are probably even cheaper than we think they are."