Energy: WTI- Why So High?

| April 10, 2013 | 0 Comments

oilHave you noticed the price of oil lately?

As of this morning, West Texas Intermediate (WTI) crude, the benchmark for US oil prices, is trading just under $94 a barrel.

While you may be growing accustomed to oil in the $90 a barrel range as a consumer, you’re probably still wondering why prices remain so high.   After all, many energy analysts are shouting from the rooftops that oil should be trading in the $70 range. 

Their reasoning comes from the idea that surging US production is providing ample supplies of US crude, which should eventually result in lower prices.

Now before I go any further, let me tell you something… 

Crude bears have been making these claims for at least a year now.  And for the record, I am not one (and haven’t been) of those analysts who believe oil will drop into the $70 a barrel range on booming US production.

However, bearish analysts are correct about one thing- US oil production is undoubtedly surging.  In fact, a recent EIA inventory report showed oil production came in at 7.15 million barrels per day for the last week of March… nearly a 20-year high!

Thanks to quickly growing production in multiple shale basins, US crude production is undergoing a massive growth spurt… one that will last for many years to come.  As a matter of fact, the International Energy Agency (IEA) predicts the US will overtake Saudi Arabia as the world’s #1 oil producer by 2020.

So that pretty much guarantees lower prices… right?

Not so fast…

The world’s other major oil contract is North Sea crude, also known as Brent.  And in case you’re unaware, Brent oil is the benchmark price for the rest of world.  In fact, two-thirds of internationally traded crude oil supplies are priced in Brent.

As of this morning, Brent is trading at $105 a barrel, about $11 higher than WTI.

So while you may think WTI is trading at nosebleed levels, Americans are actually getting a huge discount to what the rest of the world pays for crude.

However, WTI is slowly catching up to Brent…

You see, one of the reasons WTI is trading at such a huge rebate to Brent is the fact that there’s an enormous glut of oil in Cushing, OK- a major US oil storage facility. 

All that new shale oil bounty is piling up in the center of the country.  So much so that owners of the Seaway Pipeline, a major crude pipeline artery between Cushing and the Texas Gulf Coast, recently reversed the flow of their pipeline. 

Before, the reversal crude went from the Gulf up to Cushing.  But now, oil flows from the Cushing down to Gulf Coast refineries.  This reversal is slowly alleviating the glut in Cushing, thus pushing WTI prices closer to the real price of global oil- Brent crude.

What’s more, now that rail operators like Burlington Northern are getting in the US crude transportation game, even more of the US heartland oil glut is being moved to coastal refineries. 

Bottom line…

As long as there isn’t a massive economic scare (like last year’s European debt crisis), WTI prices should remain well north of $80 a barrel, and likely much higher. 

Two ways to capitalize on price movements in crude (without exposing yourself to complicated and risky futures contracts) is through the US Oil Fund (USO) and the US Brent Oil Fund (BNO). 

Both are ETFs providing investors similar day-to-day percentage returns to that of actual crude futures contracts.  USO tracks the day-to-day movements of WTI, while BNO does the same for Brent.

Until Next Time,

Justin Bennett

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Category: Brent Crude, Crude Oil, Energy

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.