Brent crude replaces domestic oil as benchmark in U.S. government's forecast
BY CHRISTIAN SCHMOLLINGER & RAMSEY AL-RIKABI Bloomberg News
Friday, December 07, 2012
12/07/12 at 4:31 AM
Learn more about Oklahoma’s energy sector: Local companies are major players in a thriving industry.Original Print Headline: Feds favor Brent over WTI
Even the U.S. Energy Department no longer deems America's benchmark oil grade the best guide to global prices, as rising production swells stockpiles at Cushing and elsewhere across the nation.
The Energy Information Administration dispensed with West Texas Intermediate for its price forecasts in its Annual Energy Outlook 2013 released Wednesday, adopting North Sea Brent crude instead. It's the first time the department has used Brent, reflecting "a growing discrepancy" between WTI and global crude prices, the report said.
WTI has fallen 13 percent this year as the U.S produces oil at the fastest rate in almost two decades amid a boom in horizontal drilling and hydraulic fracturing - fracking - that's putting the country on course to become self-sufficient in energy.
Brent, a benchmark grade for prices from Saudi Arabia to Russia, is little changed, supported by demand in Asia and concern about supply disruptions from the North Sea to Libya and international sanctions on Iranian exports.
"This makes perfect sense, as Brent is a better reflection of global oil demand and supply than WTI," Gordon Kwan, the head of regional energy research for Mirae Assets Securities Ltd. in Hong Kong, said in a phone interview. "WTI has become a misleading price indicator for global economic growth and will become increasingly less relevant versus Brent oil."
Prices have diverged as U.S. companies have struggled to move oil from North Dakota and Canada to refineries on the East and Gulf coasts.
Thursday on the New York Mercantile Exchange, WTI fell $1.62, or 1.8 percent, to finish at $86.26 per barrel. Brent crude dropped $1.78, or 1.6 percent, to end at $107.03 per barrel on the London-based ICE Futures Europe Exchange. That made for a difference of $20.77.
In the 10 years through 2010, WTI was an average $1.01 more expensive than Brent.
"This is the first time the AEO is using Brent as the main driver in the reference case" for the annual federal outlook, said Adam Sieminski, administrator of the EIA. "It was important for EIA to use a global marker."
The opening of pipelines to relieve the glut of oil at Cushing, the delivery point for Nymex futures, may still help to narrow WTI's discount to Brent, according to Goldman Sachs Group Inc. The difference in price, or spread, will fall to $6 a barrel next year, Goldman said in a research report published Wednesday.
CME Group Inc., which operates the Nymex where WTI is traded, criticized the EIA's move. WTI has been weighed down by a lack of access to waterborne markets, a situation that will change with pipeline reversals and additions and growing rail capacity, said Gary Morsches, CME Group's managing director for global energy products and services.
"I don't think it was a very good decision," Morsches said in Houston. "WTI is not going away for a long time."
Brent is priced higher than its true value because of declining production and increased shipments to South Korea, which signed a free-trade accord in July 2011 with the European Union, he said.
Daily trading in ICE Brent futures jumped 13 percent to average 560,149 contracts in the year to Dec. 5 compared with all of 2011, while Nymex WTI fell 18 percent to 567,583, according to data from the exchanges compiled by Bloomberg. That was the narrowest gap in trading volumes between the two grades in percentage terms since they began trading in the 1980s.
The number of Brent futures changing hands has also exceeded those for WTI every month from April through October, the longest streak since at least 1995.
WTI will continue to represent a land-locked crude until infrastructure is built to connect it to global markets, said Anthony Nunan, a senior adviser for risk management at Mitsubishi Corp. in Tokyo.
"Brent represents the Northwest Europe sweet market, but since it's used as the benchmark for all West African and Mediterranean crude, and now for some Southeast Asia crudes, it's directly linked to a larger global market," Nunan said in an interview. "It just became obvious to switch to another marker."
Brent is closer to the prices of crudes from the Organization of Petroleum Exporting Countries than WTI, making it a more useful reference point at OPEC meetings.
Storage facilities at the Cushing hub are holding a glut of domestically produced crude. CORY YOUNG/Tulsa World