Crude Oil Spread Drops Under $10 as West Texas Rises above $94

For the past two years the spread between Brent and West Texas Intermediate crude oil grades has been very high, vacillating between $16 and $28 per barrel at times due to huge supply coming into the holding station at Cushing, Oklahoma.  A number of factors contributed to this situation, including the rapid rise in oil production coming off the Bakken field in North Dakota and the shut down and repair of the Seaway pipeline.

Moreover, demand for Brent crude continued to match supply if not exceed supply at times.  But, that has changed in the past six months as the situation in Europe along with dropping demand in the U.S. — especially after Hurricane Sandy — has finally caught up with Brent prices.

So, to see the spread today drop below $10 on a surging WTI price ( $94.36 barrel as of Monday evening) while Brent was flat at $103.76 is a very important sign.  Inventories in the U.S. are very high and I would think that it’s a sign of incipient inflation while Brent will likely continue to track the price of the Euro and that of Gold.  For all intents and purposes WTI has completely decoupled from all currencies except for the Dollar itself.  So, a rising WTI price is more indicative of the Fed’s enormous QE program beginning to show up in the real world as al that money is now chasing oil along with equities, even though the fundamentals for both are atrocious.

About Tom Luongo
Tom is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.


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