Why You Should Completely Ignore WTI Crude Oil Prices

Includes: OIL, USO
by: David Fessler

If you’re like most people, you assume when the price of West Texas Intermediate (WTI) crude goes down, the price you pay at the pump eventually will, too.

(WTI represents the spot price of the black goo at the giant Cushing, Oklahoma storage facility. Cushing is the physical delivery point for NYMEX light, sweet crude futures contracts.)

After all, the main determinant of gasoline and diesel prices is what’s commonly referred to as the “crude oil input cost.” It’s the single largest variable component in the cost of the refining process, and ultimately the refined product.

So if input costs (NYSE:WTI) go down, so should your gasoline bill. Except it won’t… at least not much.

You see, while the WTI price is commonly the one referred to by many sources (including the media) as a proxy for “crude oil prices,” it’s generally the incorrect one if you’re pumping gas or diesel here in the United States.

How Can This Be?

Because of various transportation constraints, most U.S. refiners don’t have easy access to WTI, the oil in their own backyard. Check out the graph below from the EIA.

WTI Crude Oil Prices

Notice how much more tightly correlated gasoline and diesel prices are to Brent and LLS than they are to WTI. That’s because most of the gasoline we pump is refined from Brent and LLS, not WTI.

Since the beginning of the year, WTI crude spot prices have lagged those of Brent, the global crude benchmark, and that of Louisiana Light Sweet (LLS). The latter is a Gulf Coast crude similar to others run by U.S. refiners.

This difference in crude prices is a big source of confusion for the average investor, and the consumer is totally baffled. He or she thinks gasoline and diesel prices are based on WTI.

To further illustrate the point, consider this. Since the beginning of 2011, Gulf Coast wholesale prices for gasoline and diesel have increased 13 percent and 21 percent respectively. LLS and Brent crude prices are also up, 18 percent and 20 percent respectively.

How about WTI crude? It’s up a paltry two percent since the beginning of the year. Starting to get the picture?

The Real Problem With the WTI – Brent Price Differential

The real problem isn’t the amount of WTI available. It’s the fact that Cushing is pipeline-limited in its ability to get the stuff to more refineries that can process it. Most WTI travels in pipelines that point to Midwest refineries.

Phase 1 of the Keystone system, originally built by Conoco Phillips (NYSE: COP) and TransCanada Corporation (NYSE: TRP), moves about 435,000 barrels a day to Midwest refineries.

That leaves all the refineries on the Gulf Coast (50 percent of U.S. refining capacity), the West Coast and the East Coast having to look elsewhere for their crude. Most of what they use are water-borne ships laden with either Brent or LLS grades of crude.

Since both of those were relatively stronger in 2011 than WTI, higher gasoline and diesel prices were the result.

Until – and if – supply constraints ease, the gasoline and diesel prices we pay at the pump will be reflective of global crude prices, not those of WTI. Constantly rising demand from India and China keeps upward prices on Brent, which just makes the problem worse.

It’s just one more reason we need to get off of foreign oil, and switch to natural gas. Regular readers might have heard me say that a time or two before…

Disclosure: None