American Drivers Don't Need To Worry Surging WTI Oil Prices

West Texas Intermediate (WTI) prices have been rallying hard since the end of June, and saw a huge bounce yesterday. 

Today, they’re down a bit:

crude oil wti

What gives? 

It was inevitable that WTI prices would climb as operators increased pipeline capacity, easing the supply glut in Cushing, Oklahoma, where physical oil demanded from NYMEX WTI futures contracts gets delivered and sent on to refineries.

BP also recently restarted full operations at its refinery in Whiting, Indiana, which boosted demand, and imports have been constrained after flooding in Canada.

But the latest spike is already proving short lived, because the U.S. continues to pump out shale oil like never before. Production is now 16% higher than where it was a year ago.

The current move in oil prices appears to have been fuelled by huge trading volumes looking to take advantage of the large backwardation curve  — long-dated future prices lower than spot — that’s been forming.

“In spite of fact that supplies of crude oil at the NYMEX hub in Cushing, OK are brimming, guys living in Greenwich, CT and Bronxville, NY now own 5× the amount of physical  oil sitting in tank,” said energy expert Stephen Schork in a note Wednesday.

So the WTI surge may have been good news for traders, depending on their positions. And it’s probably bad news for refiners, since their costs now go up.

But what about American drivers?

Here’s the thing about gas prices: they are more sensitive to Brent oil prices, not WTI.  Because refined products like gasoline can be exported, it makes sense for its price to fluctuate with Brent, which is dictated by supply-demand dynamics in the U.S.

Thus, as long as U.S. refiners are selling product into the international market, U.S. gasoline prices will continue to reflect the price of Brent.

Unfortunately, Brent has also been going up — but for reasons totally unrelated to the WTI moves (mostly news in Egypt and a slightly improving demand picture):

brent crude oil chart

The only way for the shale boom to bring Brent down would be for the government to allow raw crude to be traded globally. That hasn’t been allowed since 1979. 

Until that changes, if you wanna know where pump prices are going, Brent’s your guy.

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