Brent’s premium to WTI hits Europe’s energy users

Brent Sept11.pngEurope is at the eye of the storm when it comes to energy pricing. This is the last thing required by its struggling economy.

As the chart shows, Brent in euros (green line, RHS) is now back at the same level as June 2008, whereas WTI is 35% cheaper (black line, LHS).

Such a divergence has never happened before, and is due to two factors:

• Brent is now at $25/bbl premium to WTI, vs its usual $1/bbl discount
• The euro has fallen 12% from $1.60 to $1.40

Brent’s unprecedented premium is clearly not due to strong levels of European demand. But an excellent article by Javier Blas in the Financial Times highlights one potential cause – the growing lack of liquidity in the Brent market:

• The Brent contract includes 4 fields (Brent, Forties, Oseberg, Ekofisk)
• But their output is declining and is forecast to be <1mbd by next year

The result, as the Oxford Institute for Energy Studies notes in a major new study is that:

“While the volume of production is not a sufficient condition for the emergence of a benchmark, it is a necessary condition for a benchmark‟s success. As markets become thinner and thinner, the price discovery process becomes more difficult. Oil price reporting agencies cannot observe enough genuine arms-length deals.

Furthermore, in thin markets, the danger of squeezes and distortions increases and as a result prices could then become less informative and more volatile thereby distorting consumption and production decisions.Brent’s current $25/bbl premium to WTI seems to provide prima facie evidence that such “squeezes and distortions” may now be taking place.

Brent’s premium also creates a further problem for Europe’s economy. Unlike the USA, its prices for natural gas are closely linked to oil prices. So today’s high premium for Brent creates a double whammy for consumers, and intensive energy users such as the chemical industry.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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