Courtesy of Bruce Krasting
I’m looking at something in the oil market and can’t make sense of it. Possibly someone could straighten me out.
The Brent/WTI spread hit $10 today. I can’t remember that happening before. The spread has been widening for some time. It jumped $4 recently.
The excuse offered is that the Cushing Oklahoma facility that is the settlement for the WTI contract is flush with oil. Not only is it full, a new pipeline is coming.
I find this interesting. It would appear that the US has a cheaper source of oil than does Europe. Yet we import more than half of what we consume. How do we save $10 over Europe? Do we really save that $10?
A significant amount of crude comes to the Gulf coast. That is priced as Light Louisiana Sweet (“LLS”). The LLS is trading at a premium to WTI of $8.50 LLS tracks Brent, at least it is now.
My questions are:
I) Is WTI a good measure of what the real cost of crude for the US is?
II) If the real cost is closer to Brent and therefore pushing $100 does it mean that we are about to see a big bump in gas?
III) Many (like Southwest Airways) hedged their fuel cost. Are “they” long WTI but paying LLS and therefore losing on their hedges?
IV) Is there a two-tiered energy market? If so, which region is paying LLS and which is paying WTI?
My answers, but I’m open to a better interpretation:
I) It used to be. But much less so today.
II) I think so. We will find out in 30 days or so.
III) I think some folks are getting creamed.
IV) I don’t know.
