Monday, September 12, 2011

Efficient Market: Crude Oil ?

For many month now, we can observe a growing price difference between the two major crude oil contracts:
Brent Crude, traded in Europe, and the WTI Crude contract traded in the USA. Traditionally, the Brent contract traded for about $2 less per barrel as it represents more a more "sour" type of crude (containing more sulfur). During the course of last year, this relationship has reversed quite dramatically: WTI now trades for $89 while Brent fetches $113.
This is a humongous $24 price difference, especially in light of the fact that Crude traded for less than $20 in 2002 and dipped below $40 in 2009.
Articles that I've read tried to convince me that WTI is now less of a benchmark (even though it still has a much higher open interest and trading volume). It's also claimed that the delivery point (Cushing, OK) is landlocked and that this prohibits meaningful arbitrage.
WTI prices have dropped from $114 in May to $89 now. Prices for gasoline at your station are still at their highs.
What these facts show IMHO, is that these prices are not the result of free market action. If the market would not be manipulated, sellers would re-direct their output to where they get the highest price. Someone would come up with a way to buy at $89 and sell at $113.
Perhaps it has something to do with federal regulations that prohibit the export of crude from the US ?
One thing is certain: even though US crude prices are almost 25% lower than prices in the rest of the world, US consumers are not profiting.

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