It's come up an increasing amount of times the past two weeks- what is going on with the prices of two types of oil? Why are prices going up when oil is only $86? I've been asked hundreds of times. The answer, like many things in the oil industry is somewhat complex. One must understand the oil infrastructure and how things work to fully understand.
I'll try to explain with the help of a
great analysis done by Reuters. If you have no idea what Brent crude and WTI crude is, read the
blog post I wrote last week, highlighting the differences. Once you understand that issue first, we can dive into this topic.
When oil prices are referred to in the U.S. and Canada, typically the price of WTI/NYMEX crude is referred to. I see it on my local news every night, the price of crude (or NYMEX crude to be specific) is listed. The problem is that some refineries use Brent crude and some use WTI/NYMEX crude, so only showing the price of NYMEX crude is slightly misleading. The refineries that use Brent obviously are paying more for that oil, and pass that cost on. Refineries who use WTI/NYMEX are paying less and can pass that savings on.
So why is WTI/NYMEX crude so cheap? The answer is complex. WTI/NYMEX oil is stored in vast facilities in Cushing, Oklahoma. Currently, Cushing supply of crude is near record high levels, and storage space is running low, depressing prices as supply rises. WTI/NYMEX crude is essentially landlocked and can't be shipped to the Gulf or East Coast, where it could be shipped overseas to other markets. With vast Canadian crude also being used in the Midwest, this has led to further increases of WTI crude oil at Cushing. While the Midwest benefits from the ability to receive WTI oil, many use cheaper Canadian oil, leading to a scenario of falling oil prices as supply remains lavish, but only in the Midwest.
Parts of the country that use more expensive oil will soon be paying more than the areas of the Midwest, unless supply at the NYMEX delivery point in Cushing, Oklahoma drops quickly. While pipelines are in the process of being built to eliminate this bottleneck and ship oil out via the Gulf, we're sitting on a lot of oil in the Midwest while other regions are stuck paying more for their Brent crude.
If oil continues to be abundant in Cushing and if Canadian supply continues to build, NYMEX/WTI crude could slip even lower. For now, wholesale gasoline prices are lower in the Midwest than any other region in the country thanks to the cheaper crude.
For more to read on this issue,
click here to read another opinion.