The riots in Middle East that started more than a month back in Tunisia, later continued to Egypt and now have spread to Libya are the major news affecting the energy markets, including the recent rises in crude oil price.
As a result, there are some who consider that the Middle East turmoil might affect the recent gap between crude oil price Brent oil and WTI price and will shrink it; a gap reaching as high as 19.46$/b on 14th of February – the largest gap it recorded in over in 23 years.
I have three short points to make on this subject:
- Up to now the Middle East turmoil only contributed to the spreading of the gap between Brent oil and WTI;
- The riots in Libya are more likely to increase demand for Brent oil over WTI oil;
- The spread between Brent oil and WTI started before the Middle East turmoil and is likely to be caused by other contributing factors that haven’t necessarily subsided.
Let’s shortly examine these points:
Middle East turmoil effect on Spread of Brent /WTI
In the following graph are the changes in Brent oil and WTI spot price (daily basis) since January 2011.
The graph shows that since the riots in Egypt started during end of January, followed by the riots in Libya which started in middle of February, the gap between Brent oil and WTI only widen; even though the gap might have declined in the past few days, it is still a wide gap of well above 15$/b as of February 22nd.
The Libyan effect on crude oil price
Libya, an OPEC member, has the biggest oil reserves in Africa at over 44 billion barrels, and produced in 2009, 1.65 million barrel per day. The main countries Libya exports oil are the following, among others (as of 2009, in parentheses are percent out of total oil exported): Italy (32%), Germany (14%), China (10%), France (10%)…US (5%)…
This shows that Europe, more than the US, relies on Libyan oil, and as such it makes more sense that Brent oil (from the North Sea), which is mainly exported to Europe will be more affected by the news from Middle East than WTI oil.
The reasons for the gap between Brent oil and WTI
As for the reasons for the recent gap between the two energy commodities, they are more than a few and while some of them are inter-related to the Middle East turmoil (such as the EURO/USD), they are different from one another and could influence the spread between the two in different ways.
In the final graph, shows the daily changes of Brent oil and WTI spot since 2008 up to date:
The graph shows that while in the past, for short intervals, there were gaps between Brent oil and WTI (usually WTI was higher than Brent oil), the recent spread between the two, for such a long period is something new. See that even when crude oil prices soared in 2008 reaching 150$/b, there wasn’t such a gap (in either direction) for a long period.
Therefore, we are entering uncharted waters and we should proceed with caution and without ruling any scenario out including the direction this spread could go to.
For further reading (in this site):
- Examining the spread between Brent oil and WTI – February 16
- How not to speculate on the WTI and Brent oil spread
- Oil prices outlook – 24 February