Analysis: Think $100 U.S. oil is bad? It's really much worse

Wed Mar 9, 2011 1:41pm EST
 
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By Robert Campbell

MEXICO CITY (Reuters) - Americans worried about the pain of $100 U.S. oil should worry a lot more.

Although $100 oil is the headline in U.S. newspapers, most refineries that supply fuel to service stations are paying the equivalent of a much higher price -- and those costs are already being felt when consumers fill up their vehicles.

The cause is an unprecedented disconnect between the most visible price of oil -- crude oil futures contracts on the New York Mercantile Exchange (NYMEX) -- and the real cost of physical barrels pumped from the Gulf of Mexico, Saudi Arabia and elsewhere.

This gap is caused by oil traders' growing realization that inventories at the small Oklahoma town of Cushing -- the delivery point for the NYMEX contract -- will likely be awash with crude for months to come due to booming production from Canada and shale oil producing states such as North Dakota.

Because the U.S. pipeline system was designed to import oil from the coast to the interior, not vice versa, there's no way to move the extra northern crude to the southern refiners, in places such as Houston and Port Arthur, Texas, which are paying much higher rates for crude from far abroad.

Refiners on the West, Gulf and East coasts -- who produce or import nearly 85 percent of America's fuel -- are therefore forced to pay a premium of $15 to $20 relative to the current futures price of $100 a barrel to keep their plants fed, and pump prices are reflecting that premium.

U.S. oil futures, also called West Texas Intermediate (WTI) after a kind of oil produced in Texas, are no longer the reliable yardstick for the world price and a clear signal of demand for high quality oil from the world's biggest consumer that they once were. They have instead become more of an indicator of the degree of oversupply in the heart of the North American continent.

The most visible evidence of this disparity can be seen in the price of ICE Brent crude futures, the European benchmark; it has risen 21 percent this year, while WTI futures have gained only 15 percent. Normally trading at parity to WTI, Brent surged last week to a record premium of $17.   Continued...

 
<p>A gas nozzle is used to pump petrol at a station in New York February 22, 2011. REUTERS/Shannon Stapleton</p>