In the financial world, oil is traded on various oil bourses based on different financial terms, chemical profiles, and delivery locations with the three most quoted oil products West Texas Intermediate (WTI), Brent Crude, and the UAE Dubai Crude acting as a gauge for the entire oil industry. Depending mostly on density and sulphur content oil products are categorized and priced. Brent is a waterborne crude, while WTI is a landlocked American benchmark. Historically, mainly due to location and supply-demand factors, Brent Crude has traded at +/- 3 USD/bbl to the WTI Spot price. Whenever price anomalies appeared between the two, arbitrageurs captured the price differential and normalized the spread. The graph below compares the price of WTI for delivery in Cushing, Oklahoma with that for Brent in Europe.
By looking at a long-term graph, you usually cannot differentiate between the prices of the two. However, late 2010 the divergence started to appear eventually reaching over $11/ bbl by the end of January 2011. There has been a lot of speculative reasoning for the sharp price divergence, such as volatile currency movements, demand variation, and political. On February 17th 2011 the spread reached a record $16.51 reflecting ample stockpiles at Cushing Oklahoma, civil unrest in the MENA region, and unknown future demand of China. With Brent pricing being used to determine prices of approximately 70 percent of traded oil and supply shocks expected to arise from the unrest in Libya one can expect the a spread to persist, but an important question remains and it is that where have the arbitrageurs disappeared?
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