Thursday, October 20, 2011

The "Brent Oil Premium" Could Be Another Factor That Will Rekindle American Manufacturing

Diapson Commodities just released a detailed study of the world oil market and it reports that brent oil for December 2011 delivery is selling at a $25.30 per barrel premium over West Texas Intermediate (WTI). For many detailed reasons outlined in the study, Diapson expects this premium to continue, thus the report's title "Brent Oil Premium Over WTI: It's Here to Stay."

The implications of the brent oil premium are significant because U.S. manufacturers buy oil at the WTI price, while Asian and European manufacturers pay the brent oil price, giving U.S. manufacturers a huge energy cost advantage over their foreign competitors.  Expansion of the Canadian oil sands production, the shale oil and natural gas booms, and the Keystone XL pipeline will provide additional support to this energy cost advantage favoring American manufacturers.  

Diapson Commodities predicts in its report that the "quality spread" (another term for the brent oil premium over WTI) will help to rekindle U.S. industrialization:

"Manufacturers of energy-intensive goods located in the United States will have an enormous advantage over competitors in Europe or Asia, including China, in the next few years from the point of view of costs. This might even hasten the return of manufacturing from emerging market countries back to the U.S."

MP: This is another factor favoring increased manufacturing production in the U.S., including "reshoring," (moving production back to the U.S. from overseas) as part of the pending "renaissance of American manufacturing" that has been documented here on many occasions.    

13 Comments:

At 10/20/2011 11:41 PM, Blogger Scott Gustafson said...

WTI is for delivery in Cushing OK which has a glut of oil right now. A more reasonable benchmark for the US gulf coast would be LLS which can be delivered to any of the gulf refineries. LLS sells a lot closer to Brent.

The cost advantage for US refiners isn't nearly as big as the WTI - Brent spread implies.

 
At 10/21/2011 3:11 AM, Blogger Tim Worstall said...

More than that. Keystone will go all the way to the Gulf, meaning that the Cushing oversupply (due to not enough pipelines out of the area)will disappear and so will the WTI/Brent price gap.

 
At 10/21/2011 5:44 AM, Blogger Larry G said...

what impact will the (theoretical) return of Libyan oil to the world market be?

 
At 10/21/2011 6:25 AM, OpenID American Delight said...

Pres. Obama's decline in the polls could be another factor that will rekindle American manufacturing...

 
At 10/21/2011 12:49 PM, Blogger Rufus II said...

If he were talking about Natural Gas, I'd say yes.

But, he's completely wrong about WTI. That oil will eventually have access to the "Big Water," and fetch world prices (today, about $115.00) if they have to carry it out on the backs of Mexican Mules.

 
At 10/21/2011 9:22 PM, Blogger VangelV said...

This commentary is full of ignorance. Cushing prices are not what American manufacturers pay. The imported oil would not come to the US if it could be sold at a higher price elsewhere. Cushing is just an anomaly that is not that meaningful except to those looking for a way to hype up a weak recovery that is getting weaker.

 
At 10/22/2011 12:23 AM, Blogger truth or consequences said...

Ignorance????!!!!

Cushing is where the WTI price is SET. If Cushing tanks overflow the WTI price drops, if too many of those thousands of tanks are empty the price rises.

There is just so much capacity from Cushing to the Gulf where all the refineries are. More is coming in than can be pumped out of there.

In a perversion of the supply and demand the price of WTI is less than Brent even though the Gulf refineries can't get enough WTI crude via pipeline...so they buy at the Brent price from tankers.

To add insult to injury ConocoPhillips operates a pipeline from the Gulf to Cushing that is moving oil in the opposite direction every day!!!! to feed it's refineries in the Chicago area. NUTS

I know everybody on here loves to worship at the altar of "free markets in everything" but this is stupid.

It's big corporations doing "what's easy, what's always been done, what's always made money" and lazily feathering their own nests in the process. The consumer is geting hosed.

But hey, don't you let the government get in there with some oversight/regulation....cause it'll be way worse???? yeah right, hard to imagine "way worse" than what's going on now.

Keystone XL can fix all of that....if it ever gets built!

 
At 10/22/2011 9:42 AM, Blogger VangelV said...

Cushing is where the WTI price is SET. If Cushing tanks overflow the WTI price drops, if too many of those thousands of tanks are empty the price rises.

Most of the refineries in the United States buy oil that is indexed to Brent, not WTI. If you take a look at Louisiana Light Sweet, Libyan Light, Nigerian Bonny Light, or Dubai Crude you see that they trade together with Brent, not WTI. As I wrote, in a world where most oil moves by VLCCs the price of a landlocked contract means very little.

There is just so much capacity from Cushing to the Gulf where all the refineries are. More is coming in than can be pumped out of there.

There is a big problem with transportation so the Gulf refineries pay Brent prices, not WTI prices. Of course, the low prices at Cushing make it very difficult for most American shale producers to make a profit, which is why so many exist by consuming capital rather than provide financing out of operations.

In a perversion of the supply and demand the price of WTI is less than Brent even though the Gulf refineries can't get enough WTI crude via pipeline...so they buy at the Brent price from tankers.

There is no perversion. If American oil prices were that far below Brent the imports would dry up. If you look at Alberta, you find that the producers in the tar sands are looking to build a pipeline to the west coast where they can ship to the Asian markets and get a much better price for their product. If the Keystone project is cancelled Americans will have to figure out how to make up the shortfall or will have to pay a premium to get the oil back.

To add insult to injury ConocoPhillips operates a pipeline from the Gulf to Cushing that is moving oil in the opposite direction every day!!!! to feed it's refineries in the Chicago area. NUTS

I know everybody on here loves to worship at the altar of "free markets in everything" but this is stupid.


There is nothing free market about the heavy regulations that control the US energy industry. Oil flows to Chicago because that is the most profitable option.

It's big corporations doing "what's easy, what's always been done, what's always made money" and lazily feathering their own nests in the process. The consumer is geting hosed.

You have no idea what you are talking about. The energy companies make very little in the way of profit from their operations. Most of the price that you see when you fill up your tank comes from taxes, royalties, charges, and fees paid to governments at every step of the process.

 
At 10/22/2011 12:38 PM, Blogger truth or consequences said...

So Vange....I don't find much to disagree with your post....

except... that Exxon made a 30 BILLION dollar profit last year, a 53% increase over the year before. The increase is reported, BY EXXON no less, "as a result of higher oil prices". Those are the facts, look em' up.

How does that jive with your: "The energy companies make very little in the way of profit from their operations."

Thank you for confirming that Conoco Phillips is buying Brent, at a higher prie than WTI, at tidewater in the gulf and shipping it all the way to Chicago for refining. Does the fact that there is an abundance of crude available at a lower cost at Cushing (half way there already) suggest to you that the "invisible hand" is working perfectly and you are paying the lowest price possible when you fill your tank?????

The PR machine of Big Oil is just as good as Big Pharma's, it has been very successful at convincing Americans that they really just "serve the people" and are only rewarded with a "reasonable profit"...yeah, right!

"You have no idea what you are talking about"???? Now was that really necessary Vange? And given that I agreed with 80% of your post...then what's that say about you;)...LOL...Regards and let's try to keep it civil ok? TC

 
At 10/22/2011 3:30 PM, Blogger truth or consequences said...

and Vange...since you seem to know something about pipelines....

the "Northern Gateway" project from the oil sands to the Pacific (Enbridge) is facing stiff and substantial opposition.

Kinder Morgan has applied to upgrade it's existing pipeline to Vancouver BC to ship crude to Asia and that looks like a slam dunk... but it will hardly put a dent in the "problem".

Keystone XL (Trans-Canada Pipelines) would make affordable oil (oil sands crude sells even at a discount to WTI right now) widely available....and THAT would be an economic generator for all of North America...if we agree with the article and the the "invisible hand" really works.

My guess is that if Keystone is approved it will essentially kill Northern Gateway....if Keystone is rejected then watch out...the enviros and the indians better get out of the way because it will be built and quick (relatively speaking)... the oil will go to Asia and the price of oil sands crude will surpass WTI.

Just my prediction/opinion of course...

 
At 10/23/2011 9:59 AM, Blogger VangelV said...

except... that Exxon made a 30 BILLION dollar profit last year, a 53% increase over the year before. The increase is reported, BY EXXON no less, "as a result of higher oil prices". Those are the facts, look em' up.

So? Do you know how much capital has been invested in Exxon's operations and by companies that provide it with services? And do you know that Exxon made far less in profit than governments got by taxing its products? Given the fact that energy company profit margins are much lower than food, defense, network equipment, mining, pharmaceuticals, railroads, insurance, entertainment, etc., I do not see anything that would suggest that they are 'making too much', whatever that my mean.

How does that jive with your: "The energy companies make very little in the way of profit from their operations."

My statement is supported by the data. I suggest that you actually do some research before you make arguments that you cannot support.

Thank you for confirming that Conoco Phillips is buying Brent, at a higher prie than WTI, at tidewater in the gulf and shipping it all the way to Chicago for refining. Does the fact that there is an abundance of crude available at a lower cost at Cushing (half way there already) suggest to you that the "invisible hand" is working perfectly and you are paying the lowest price possible when you fill your tank?????

Yes, the market is working quite well. Since there is no way to get additional oil out of Cushing to Chicago at a lower price than the imported oil it makes sense to do what can be done until the regulators allow pipelines that will lower the costs. Of course, once the Cushing bottleneck is removed you will see WTI prices move along with global prices and the discount will be removed by the invisible hand. You seem to believe in free lunches. There aren't any.

The PR machine of Big Oil is just as good as Big Pharma's, it has been very successful at convincing Americans that they really just "serve the people" and are only rewarded with a "reasonable profit"...yeah, right!

Big Pharma is protected from competition by the FDA, which is the reason why profits as a percentage of revenues were around five times higher than on energy. As I pointed out above the data shows that profit margins for the energy companies are quite low compared to the average industry sector in the US.

"You have no idea what you are talking about"???? Now was that really necessary Vange? And given that I agreed with 80% of your post...then what's that say about you;)...LOL...Regards and let's try to keep it civil ok? TC

It is necessary because you do not do the research necessary to support some of the very false claims that you are making. Note that I do not slam people here for sloppiness or misstating something. This is a blog and people can do things in a hurry or forget to cut out a statement that they know to be wrong. But in your case, you clearly did not do the work necessary to comment properly and chose spin over actual facts. I have little time for that from people who are smart enough to do better.

 
At 10/24/2011 2:50 PM, Blogger truth or consequences said...

Well Vange....

I don't do my research? I clicked you YOUR link....and "mining-crude oil production" is right up there at number two....23odd percent!

You choose to pick "energy", I'm guessing, which most probably includes thermal coal and natural gas (two commodities under substantial pricing pressures).

You own shares in Exxon or something?;););) I'm heavy into oil sands, conventional AB oil, Bakken oil and even a bit of TX Eagle oil. (half a dozen names). TC

 
At 10/24/2011 10:07 PM, Blogger VangelV said...

I don't do my research? I clicked you YOUR link....and "mining-crude oil production" is right up there at number two....23odd percent!

You choose to pick "energy", I'm guessing, which most probably includes thermal coal and natural gas (two commodities under substantial pricing pressures).


I was thinking of Exxon, which has a profit margin of around 8.5%, around three times less than the 23% you are claiming. You can look at a comparison between Exxon and some well known companies here. Coal companies do not necessarily have lower profit margins than oil companies. How well they do depend on the grades of coal that they sell and the contracts that are signed with the users. I think that the last time I looked Peabody had higher margins than Exxon but both trailed CNQ.

You own shares in Exxon or something?;););) I'm heavy into oil sands, conventional AB oil, Bakken oil and even a bit of TX Eagle oil. (half a dozen names).

I do not own Exxon. I prefer CNQ, SU, or smaller players like Black Pearl Petroleum. I would not buy any shale oriented players because few of the companies can make a consistent profit from shale production.

 

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