Thursday, November 17, 2011

The Birth of Arbitrage

Arbitrage is the simultaneous buying and selling of an asset in two separate markets to exploit a price difference.

The Benchmarks Aren't Speaking to Each Other!

For many years, Brent crude oil sold a a very similar price to West Texas Intermediate crude oil.  The former is the benchmark price for oil in Europe; the latter for the U.S.  In the early years of the Brent field (between Great Britain and Norway in the North Sea), Brent sold at a discount to WTI.  Thereafter they sold at parity.  In the last year, Brent has opened a big premium up over WTI, averaging $27 for one recent month.  What happened to arbitrage and the Law of One Price?  A glut of oil in cushing, OK where the market for  WTI is and a shortage in Europe.

That is about to change.

Chip Cummins reports in the Wall Street Journal that Entbridge of Canada is buying the recalcitrant half of Seaway pipeline and will reverse its flow south.   Let the arbitrage begin!

For Kansas:

This means lower margins for Kansas refiners, higher income for Kansas oil producers, and probably higher local gasoline prices.

WSJ's Liam Denning and Mean Street host Evan Newmark discuss WTI's price spike back over the $100 per barrel mark on news of a Canadian company's investment in a gulf coast-to-Oklahoma pipeline.

1 comment:

Anonymous said...

Wichita has been "enjoying" relatively low gasoline prices compared to the rest of the US during the last few years. I base this upon the prices I've paid for gasoline when I've travelled around the US.

The demise, or at least an extended postponement of the Keystone pipeline until after the 2012 election will mean a significant and unpleasant change for Kansas energy consumers over the long term. I wonder when the state mandated increase in electricity costs that will be appearing due to the increased usage of wind and politically correct power sources takes place.

As Europe implodes (see Niall Ferguson's latest projection on Europe in 2021) the fallout will soon be washing ashore and it is not pretty.