The mysterious price of oil

The oil industry’s two main pricing benchmarks — Brent and West Texas Intermediate (WTI) — have never been further apart than they are these days.

At the time of writing, Brent crude was quoted on ICE at around $107 a barrel, while WTI was closer to $91. At its widest, the price disparity touched $23, which is causing havoc for hedgers such as airlines.

The cause of the disparity depends on who you ask, which means that the real price of a barrel of oil is anyone’s guess, as our readers concluded in last week’s poll.

On one hand, the US benchmark is trading lower than other Gulf of Mexico crudes due to a glut of oil at the landlocked WTI delivery point in Cushing, Oklahoma. According to some, WTI has become irrelevant and big suppliers such as Saudi Arabia have dropped it as a pricing benchmark for sales to the US. Even Delta Airlines is reported to have switched to Brent.

However, Brent has its own issues — dwindling supply in the North Sea means that the underlying market is increasingly sensitive to manipulation. Indeed, the benchmark has already incorporated three other North Sea oil fields (Forties, Oseberg and Ekofisk) to broaden the underlying market. Platts, which in effect manages the benchmark, might soon have to include more fields, such as Statfjord, but there is no escaping the region’s dwindling production. Other reports also blame Brent’s rise on the loss of Libyan output.

The result is that the price of both the world’s oil benchmarks is generally considered to be distorted, so, in short, we don’t know what the price of oil is, but we suspect it’s closer to the Brent benchmark (currently around $107) than the WTI one (about $91).

If markets cannot determine the price of a barrel of oil, the world’s most heavily traded commodity, we wonder at their ability to accurately price anything, particularly esoteric financial assets with much less transparent supply and demand.