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Brent: The Son-in-law You Never Wanted

July 3, 2013
By: Davis Michaelsen, Pro Farmer Inputs Monitor Editor


As Egypt unravels, crude oil pricing is moving notably higher. President Mohamed Morsi was issued an ultimatum by the Egyptian military that expired earlier today. Protesters have taken to the streets and demand the ouster of President Morsi.

According to EIA, Egypt is the largest non-OPEC oil producer in Africa, and the second largest natural gas producer on the continent. Political unrest at the fever pitch we see from live feeds from Cairo will certainly lend upward mobility to Brent futures, but WTI has also responded with upward motion of its own topping psychological $100.00 today, narrowing the Brent/WTI spread to just $4.43.

The narrowing of the spread is bad news for American oil producers, but the increased price for WTI will serve the same purpose in the near term. In yesterday's article, Tight Crude Spread Influences Rail Shipments, we noted that under a wide crude spread, U.S. producers in the North will often ship crude past WTI's Cushing, OK facility straight to the Gulf where Brent's higher sticker price can be captured. But the narrow spread all but eliminates the benefit to the bottom line.

WTI crude has been considered something of a maverick in the global oil scene, separate from Brent in type and grade, but a narrowing of the spread has been predicted for some time now and the months ahead may couple the two. WTI has had an insulating effect against the fear premium imposed on Brent, but limitations on processing the light sweet crudes from shale has Gulf refiners still reliant on Brent.

If WTI and Brent are to couple, the results would be disastrous for fuel pricing in the United States. Energy independence and diminished reliance on imported oil are now reliant on our ability to use the resources we have got. Light sweet crudes are often shipped to Canada where the product is refined and sent back as gasoline and other petroleum products because the U.S. lacks the infrastructure to get it done.

So will the Egyptian crisis make gasoline more expensive here in the U.S.?

The answer is no. If unrest in North Africa or on any other foreign shore raises prices, it is our own lack of refinery capacity to blame. Not since 1973 has a new refinery been built in the United States. But with WTI crude in such good supply, and we with no way to turn it into gasoline, they had might as well be pumping tapioca pudding out of the shale as light sweet crude. And as the WTI-Brent crude spread narrows, Brent looks more and more like the oily wierdo you prayed your daughter wouldn't bring home, and then marries.

Without a domestic use for domestic crude and improved refinery capacity, WTI will have no choice but to couple with global crude pricing, and the last thing America needs is an oily son-in-law named Brent.

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