A cocktail of factors, including ample United States crude stockpiles, unrest in the Middle East and North Africa and keen Asian demand, has caused benchmark oil prices to trade more than $20 apart, the biggest ever gap.
Last week, a barrel of Brent crude oil struck a record premium of $22.79 against the price of New York crude, or West Texas Intermediate (WTI).
New York prices have mostly been weighed down by plentiful crude supplies in the key transit hub of Cushing, Oklahoma, in the United States - which is the world s biggest global oil consuming nation.
However, London Brent oil has found solid support from mounting supply concerns on the back of violent unrest in Libya and Nigeria, alongside falling North Sea production. "The current very high Brent prices reflect rising geopolitical risk and possible tensions on world supply/demand balances in the future," said Credit Agricole CIB analyst Christophe Barret. "WTI, more dependent on US mid-continent balances should remain largely isolated from the tightening in world crude markets," he added.
Upbeat economic data Brent oil on Tuesday topped $121 on the back of upbeat economic data while New York crude languished almost $23 behind.
Analyst Damien Cox, at consultancy EnergyQuote JHA, agreed that the gap existed because of the different supply pictures. "The spread between Brent crude and WTI has moved to very wide levels which reflect the differing fundamentals of the two markets," Cox said. "US crude stocks and importantly those at Cushing continue to trend well above average at the moment - indeed, they re above the upper limit of their average range for the time of year. "Given a very well supplied crude market in the United States, the European market is looking less so."
Brent was also driven up by news of a fresh supply outage in Nigeria, which is Africa's largest crude producer and the eighth biggest in the world. Shell in Nigeria has declared 'force majeure' and warned it may not be able to meet its contractual obligations for Bonny Light crude - a type of Nigerian oil - after multiple pipeline fires and leaks blamed on sabotage.
"The weakness in the WTI/Brent spread is possibly due to Shell declaring force majeure on Nigerian Bonny Light shipments," PVM Oil Associates analyst Tamas Varga said.
Unrest in Libya
The Brent July contract's expiry on Wednesday could have also played a role in the record price differential, Varga added. Another factor has been unrest in Libya, which erupted in February and has removed about 1.3 million barrels per day from the global oil market.Brent has also drawn strength from keen demand in emerging markets across Asia.
"The explanation for the differential appears to coincide with Brent s use as a benchmark for Asian demand and WTI being more closely aligned with the US," Westhouse Securities analyst David Hart said. "As such, Brent seems to be benefiting from the growth differentials in these regions and the outlook in the future. There are also supply factors affecting the prices such as a re-opened oil pipeline from Canada to America, and lower loading expectations in the North Sea in July," he added.
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