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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: CommanderCricket who wrote (49957)8/27/1999 11:41:00 AM
From: Evolution  Read Replies (2) of 95453
 
The spread between Brent and WTI is very interesting. I don't recall it ever being this close

It may just reflect increased consumption in Europe.

Besides the difference due to grade quality, I guess a major factor for the difference is transport.

To analyze the trends, let's take simple limit cases:
1-If all Brent were sold in the US, full transport costs would need to be added to Brent to be competitive with WTI. --> Case of maximum differential.
2-The opposite case, i.e. all WTI were sold in Europe, full transport costs would need to be added to WTI to be competitive with Brent. --> Case of minimum differential (even possibly reversal of differential)

In conclusion, the fact that the differential is decreasing may just mean that more Brent is used locally instead of being transported out. Which means increased Europe consumption.

The simple reasoning above takes the simple case of 2 geo-markets US and Europe. The other geo-markets complicate the picture, but do not invalidate the effects of Transport costs between US and Europe. For a market equally distant, cost-wise, to US and North Sea, the differential should be zero, at same grade quality.

Inefficiencies in the markets may have greater short-term effects, but in average the reasoning above should stand.

Does that make sense?

e-
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