crude oil prices: divergence & convergence in 2011
When historians write about the major developments in petroleum markets of 2011, they will be intrigued by the divergence and convergence of prices for the major crude oil price benchmarks. They will probably marvel at the simplistic explanation for the abrupt divergence of WTI prices versus all other global benchmarks. Various sources laid the basis for ever deeper pricing discounts for WTI at the feet of "surplus supply at Cushing, OK". This answer has to be dismissed as completely unsupportable because WTI pricing discounts were at their widest during August and September but crude oil inventory at Cushing had already declined 12 million barrels or 29% (30 million barrels at the end of September versus 42 million barrels at the end of March) during the previous 6 months.
As abruptly as price divergence emerged, prices began to converge equally abruptly. From a discount of almost $29 per barrel versus dated Brent in mid-September, WTI price discounts were less than $8 per barrel by mid-December. Again, nothing in the current market distribution system actually changed. However, WTI and dated Brent can be viewed as very indicators of the degree of optimism or pessimism for political, economic, and financial system trends in North America and Europe.
During the spring and summer, political gridlock in the U.S. prompted financially oriented traders to take a very pessimistic view of near term trends for the U.S. economy and U.S. financial institutions. Specifically, WTI prices dropped 11.2% in August but dated Brent prices declined only 5.8%. As these fears faded, financially oriented traders became less pessimistic and WTI prices rebounded strongly. Specifically, WTI prices increased 12.4% in November but dated Brent increased only 1.5%.
Trends in daily price changes during September through November (and continuing through mid-December) were remarkable for the speed of reconvergence. Throughout 2011, daily changes in prices were virtually all equal to or less than +/- 2%.
Presidential year election politics will move to the forefront as one of the most important variables for consideration by financially oriented traders. The trick in translating day to day developments on the campaign trail into meaningful indicators for trends in crude oil prices. We evaluate these and many other questions for clients who subscribe to "NGL Markets in North America".
