Tuesday, February 28, 2012

Oil arbitrage

Brent crude (priced in Europe) and West Texas Intermediate (WTI) (priced in OK) have deviated in price quite a bit recently - raising the question - Are higher oil prices a result of a lack of pipelines between OK and the East Coast?

It's an interesting question.  Certainly more pipelines would allow oil to flow more rapidly to wherever markets need it.

In the case cited above, the higher prices are in Europe and presumably would be lower if we could export more WTI to that market to substitute for Brent crude.  But this isn't likely to impact domestic prices, as domestic prices are driven by the price of WTI.

I'd have thought that a pipeline would result in WTI prices rising and Brent prices falling as the mispricing declines.

It's also worth remembering that the keystone pipeline proposal runs north-south and not east-west.