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The Divergence of Spot Oil Prices


Monday, April 21, 2014

By Michael Owyang, Research Officer

Prior to 2011, the two main spot oil prices—West Texas Intermediate (WTI) and Brent—moved almost in lockstep.  This is not surprising because WTI and Brent crude are essentially the same product, and one would expect arbitrage to eliminate price differentials.  After 2011, the two prices diverged, as seen in the chart below.

The explanation for their divergence might lie in how—or perhaps where—the two prices are determined.  WTI is a grade of crude oil sourced domestically and has prices settled in Cushing, Okla.  Brent is sourced in the North Sea and settled electronically.

In early 2011, Cushing reached its storage capacity, causing a difference between the two spot oil prices that could not be eliminated by arbitrage.  No arbitrage opportunity existed because of the inability to move oil from Cushing to another location where it could be sold for prices closer to the settlement price of Brent crude.

Recently, however, the difference between the two prices has declined.  During the summer of 2013, the difference between the two spot prices declined substantially.  Since then, the difference has risen a bit, but stabilized around $6-$10, considerably less than the $17 average difference between the beginning of 2011 and the end of 2012.

This divergence has caused many to view the American oil price differently.  WTI was commonly considered the American oil price, but many think Brent is now a better measure.

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