PhD thesis
There are several benchmarks that are used to price oil. For oil produced in North America, it’s priced off against WTI benchmark (talk a bit about how this benchmark is determined). For oil that is produced in the North Sea and mostly for other parts of the World as well, Brent Global is used as a benchmark for pricing purposes. Historically the prices of WTI and Brent have always stayed really close to each other, the difference in them being attributed to the existence of transportation costs. Hence, the law of one price seemed to be held in this market. However, the Oil market has undergone some serious structural changes in the recent past.
With these unconventional oil resources up for grabs US’s oil production has increased form a mere few hundred thousand bbl./d to several million barrels of oil per day. This shale revolution is predicted to make US energy sufficient and independent in the next couple of years and the US might actually start exporting oil to other nations. The US is also tipped to out produce Saudi Arabia in the upcoming years, a phenomenon that was unimaginable only a few years ago.
One of the consequences of this shale boom has been the uncoupling of the WTI and Brent Global benchmarks. With so much oil production suddenly coming online the US pipeline infrastructure was not built to handle such massive amounts. As a result a supply glut ahs been formed at Cushing, Oklahoma – the delivery point of US energy futures contracts. With an excess of supply being present in the North American market, the price of WTI has rapidly fallen and it now trades at a discount of around 15 dollars to the Brent global benchmark. The discount has even risen to 25 dollars at times owing to different factors driving further disparity between the two benchmarks.
With these unconventional oil resources up for grabs US’s oil production has increased form a mere few hundred thousand bbl./d to several million barrels of oil per day. This shale revolution is predicted to make US energy sufficient and independent in the next couple of years and the US might actually start exporting oil to other nations. The US is also tipped to out produce Saudi Arabia in the upcoming years, a phenomenon that was unimaginable only a few years ago.
One of the consequences of this shale boom has been the uncoupling of the WTI and Brent Global benchmarks. With so much oil production suddenly coming online the US pipeline infrastructure was not built to handle such massive amounts. As a result a supply glut ahs been formed at Cushing, Oklahoma – the delivery point of US energy futures contracts. With an excess of supply being present in the North American market, the price of WTI has rapidly fallen and it now trades at a discount of around 15 dollars to the Brent global benchmark. The discount has even risen to 25 dollars at times owing to different factors driving further disparity between the two benchmarks.