by George Dorgan
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While speculation in the futures market was certainly a component of price increases over the last decade, research has yet to provide incontrovertible evidence that it was a major driver of prices. Over the last decade the number of futures contracts on NYMEX increased at over ten times the rate of increase of world petroleum consumption. In recent years, the ICE Brent contracts grew at a higher rate than NYMEX.
A NYMEX futures contract is a contract to deliver 1,000 barrels of light sweet crude oil in a certain month to the buyer at Cushing, Oklahoma. There is a direct link between futures prices and the cash price at Cushing. We will illustrate with an example. A producer of crude oil is offered $80 per barrel for 1,000 barrel of oil today. The same producer sees that the futures contract for delivery next month is trading at $85 dollars. Instead of selling at $80 to the refiner the producer could sell a futures contract for delivery next month at $85, store the 1,000 barrels for a month and be $5 better off less the cost of a months storage. The refiner needing the 1,000 barrels of crude today is then in the position that he must offer the producer something closer to the $85 NYMEX price to obtain the crude.
Historically, the price of NYMEX crude typically traded near the Brent price with a small premium. Since late 2010, Brent and NYMEX prices have diverged with West Texas Intermediate at Cushing, Oklahoma selling often selling more than $20 below Brent and other comparable crude oil. While continually quoted in the U.S. media as the oil price, oil at Cushing is not currently representative of world oil prices. The reason for the discount is high stocks of oil at Cushing with a limited number of refiners that can be served by pipelines out of Cushing.
Additional oil from Canada and the Bakken formation in North Dakota caused the local supply to exceed demand of the refiners served by pipelines out of Cushing. This resulted in oil stocks to building to 1.5 – 2.0 times the normal level. High stocks at Cushing depressed the local price, but not the price internationally. A return to the normal price relationship with WTI at a modest premium to Brent awaits improved pipeline access between Cushing and the refineries on the gulf of Mexico.
