One crude oil languishes, another spikes

One crude oil languishes, another spikes

	Published : Thu, 31 May 2007 21:35 By : Agencies Print this Story

NEW YORK (AP) - Oil prices have held comfortably below $70 a barrel so far this year -- or have they?

The benchmark oil in the U.S. on the New York Mercantile Exchange has lost some status to other grades of crude, analysts say, as supply issues at home have depressed its price relative to competitor crude oils. Brent crude, for example, topped $71 a barrel last week.

Crude oil on the Nymex ended 2006 at $61.05 a barrel, while Europe's Brent crude closed the year at a slight discount of $60.86 a barrel. That relationship was the normal order of things for years: Nymex crude oil -- pegged to high quality light, sweet West Texas Intermediate -- has enjoyed benchmark status in the Americas for two decades and has generally fetched a premium to other grades of crude.

Recently, the balance has shifted.

Outages at refineries near WTI's delivery point in Cushing, Okla., have left inventories swollen. A lack of sufficient pipeline capacity to move excess oil from landlocked Cushing to points outside the Midwest has contributed to the buildup. At the same time, a surge of crude oil exports from Canada has flowed into the Midwest. That has depressed WTI prices compared with other crude oils, such as Europe's Brent.

Brent crude traded on ICE Futures in London began a steep climb in late January from near $55 a barrel to settle near $71 last week, while Nymex crude, which traded for about $52 early in the year, hasn't broken $69 a barrel and has recently traded at a substantial discount to the less light, less sweet Brent crude, according to data by Thomson Financial.

The differential does, if indirectly, affect what drivers pay at the pump, says Phil Flynn of Alaron Trading Corp.

That refinery troubles have depressed the price of WTI means refineries are producing considerably less gasoline -- which in turn has driven pump prices up sharply. The average U.S. retail price of unleaded, regular gasoline peaked at an all-time high of $3.227 a gallon on May 24, according to AAA.

The spread between the front-month contracts for Brent and WTI also reached a fresh high on May 24, with Brent closing at $6.54 premium, according to Barclays Capital analyst Kevin Norrish. On that day, concerns over Iran and supply disruptions in Nigeria riled the market.

Oil traders pay close attention to world politics, pricing in market fears over conflicts in oil-producing nations and tensions between them and the major consumers -- the U.S. being the world's largest. But recently, the oversupplied WTI has been less sensitive to geopolitical concerns, say analysts, having hardly registered last week's news of Iran's continued nuclear development or unrest in Nigeria.

Meanwhile, Brent spiked above $71 a barrel.

'Brent is much more reflective of what's happening outside the U.S.,' said Oppenheimer analyst Fadel Gheit.

The WTI contract has been strapped instead by local refining constraints.

Valero Energy Corp., the nation's largest independent refiner, runs a major plant near Cushing with capacity to pump out 170,000 barrels of oil daily. A fire in mid-February shut down the entire McKee refinery for almost two months. Then, last week, a problem with one of the units that converts crude to gasoline went down, cutting output by more than half to 80,000 barrels per day.

Other refineries have also suffered unplanned outages at the same time.

To alleviate the bottleneck at WTI's Cushing delivery point, there is talk of building new storage capacity or pipelines and proposals to build refineries in Canada to soak up rapidly rising production there, said Antoine Halff of Fimat energy research. But such projects can take time.

'If you want to see where the market is going to be, Brent for the next few months is going to be a more reliable benchmark than WTI,' he said.