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News In Brief

What’s up with oil?

Paddy Hirsch Aug 22, 2011

Libyan rebels are in Tripoli, spurring hopes that Libya will start pumping oil again soon. But oil prices are up today. What’s up with that?

Many economies around the world are in a terrible state, and demand for oil is still quite low. So you’d think an increase in supply from Libya would push oil prices down. And yet the price of West Texas Intermediate light, sweet crude* (WTI) is up more than one percent today.

The thing is, the WTI price is not the only oil price in the world. There are, in fact, four big benchmark oil prices: WTI, which is the benchmark for oil pumped in the US, Brent, which is pumped out of the North Sea, Dubai Crude from the Persian Gulf and the OPEC Reference Basket.

The Brent and the WTI are the most oft-quoted: WTI because the US is such an important market, and Brent because it’s the benchmark for about half the oil produced globally.

But here’s the important thing: the oil priced according to Brent tends to flow into the European market, while the oil priced against the WTI tends to flow into the US market. And those are very different markets, with different dynamics and different demand cycles.

WTI is a slightly better grade of oil than Brent – it’s a bit lighter, and a bit sweeter. So it usually trades at a slight premium of about $1.30. For the last few months, however, Brent has been as much as $26 more more expensive than WTI.

Why? because of Libya.

Libyan oil was priced against the Brent benchmark, and is highly prized by European refiners. When Libya stopped pumping, that meant less oil flowing into Europe, which meant more demand for the oil that was left, which meant higher prices. So the Brent benchmark rose.

Meanwhile, in Texas, the oil was pumping steadily, but there was a little wrinkle. In the first half of this year, an unusual number of US refineries were closed for maintenance work. Fewer buyers meant less demand, which meant the price of oil fell.

The gap between WTI and Brent got wider and wider, but today it’s moving the other way. WTI prices are up, and Brent is falling.

Brent is down because people are hoping that Libya will start pumping again soon. If they’re right, there’ll be more supply for those European refineries, and the price should fall further.

Meanwhile, WTI is up because refineries in the US are buying again. Also, oil watchers are keeping a close eye on the Gulf of Mexico, as hurricane season goes into full swing. The U.S. National Hurricane Center said Irene could be in Florida by the end of the week.

*A quick explainer on the term light sweet crude: it’s light because it’s low density, and it’s sweet because it’s low in sulphur. There are all sorts of other types of crude sold in the market (yes, you can buy West Texas sour!), but refineries love the light, sweet stuff because it’s easier to turn into fuel.

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