The Chicago Mercantile Exchange (now the owner of the NYMEX petroleum contracts) seems suddenly very concerned about the questions surrounding its light sweet crude contract. The latest evidence? A webinar set for next Thursday, March 12, to discuss what is facing the crude contract: "...some market pundits have responded by questioning the WTI market and delivery mechanism." (Note: a report on the event can be found here. )
By the way, that quote comes from CME itself in its announcement about the webinar. It's certainly confronting the issue head on.
The issue for CME is fairly well known: its delivery point is Cushing, Oklahoma, there are many pipeline routes bringing crude in there, there aren't quite as many going out, and there are lots and lots of storage tanks. So what has happened now for several months is that a significant portion of the world's growing crude surplus has poured into the tanks (weekly published inventory statistics show Cushing stocks rising as a percentage of total US stocks). That has pushed the price of Cushing crude well below those of other benchmarks and US grades that trade against it. It also blew out spreads between what people hear on radio about the price of crude ("Crude fell another 90 cts today, the fourth consecutive decline") and the retail price at the pump, which has not followed suit. So the link that consumers have always heard about just doesn't seem to exist as they fill up their cars with gasoline prices that had been on the rise.
Full disclosure: one of the things that we believe has led CME to be particularly aggressive in its defense in recent days, in particular, has been Platts' launch of a new assessment -- the Americas Sour Marker -- to mirror the value of sour crude on the US Gulf Coast, seen in some quarters as an attempt to establish an alternative US benchmark that doesn't have the landlocked problems of Cushing and reflects the higher sulfur levels contained in many new crude streams.
The irony in all this is that WTI, as measured by crude on the CME, has now moved to a level more than Brent, as measured by its price on the Intercontinental Exchange. The fact that it was below Brent for so long was viewed as a sign of its inherent flaw.
Comparing first month WTI to first month Brent is fraught with all sorts of imperfections, but it is a spread that many traders look at. It was solidy $3, $4 in favor of WTI through the early fall, which is in line with historic norms, before it started to slip. WTI fell below Brent in early December, falling to a deficit of $7 to $10 for several days on two separate occasion. WTI's value stayed less than Brent until today, March 6, when April WTI settled at $45.52, and April Brent closed at $44.85.
The best thing that could happen to the WTI contract would be fthe construction of new pipeline routes out of the region, so that if the price got too low relative to other grades, crude could be shipped out to take advantage of that opportunity. Alas, various projects that would do that remain two to three years away.
These inversions have occured before, the most recent being in spring 2007, when a local refinery went down, backing up crude at Cushing. It eventually eased; this one did too. But what was notable this time around was that the level of criticism seemed to ratchet up another level, with even noted analyst Paul Horsnell devoting a portion of his widely-read weekly report to the issue. He was critical of the flaws in the contract.
So one thing that's different this time is that CME is going on the offensive. Tune in to the webcast next week; it should be interesting.
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