By Sarah Kent and Jerry A. DiColo Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The two oil futures contracts used to set the price of crude worldwide are spinning further out of each other's orbit, and traders in both markets are struggling to explain why.
Light, sweet crude settled 2.6% lower at $99.29 a barrel on the New York Mercantile Exchange Friday, while Brent crude on ICE Futures Europe fell 84 cents to $118.73 a barrel.
The nearly $20 gap is an all-time high, and would have been unthinkable before this year. The two contracts traditionally trade within $1 of each other. But a glut of oil at the Nymex contract's delivery point in Cushing, Okla. has weighed on U.S. futures prices, while production problems in the North Sea have boosted Brent's value.
But this week's blowout in the price spread has some traders scratching their heads. Cushing supplies are at their lowest since February, and Brent's production issues have been well-telegraphed over the past few weeks. Yet the gap, which had stabilized between $12 and $15, has steadily grown over the last few trading sessions.
"This level is kind of an absurdity," said Kyle Cooper, managing partner at IAF Energy Advisors.
Both contracts had a volatile week, first rising after the Organization of Petroleum Exporting Countries failed to raise production quotas at its meeting on Wednesday, then sinking on Friday on reports that Saudi Arabia increased output on its own. Brent held onto more of its earlier gains on Friday, creating the nearly $20 price gap.
Analysts said the price spread may be widening due to growing concerns about slowing economic growth in the U.S. compared to other parts of the world, which could hold back U.S. oil prices. Cushing levels are also still high, and unlikely to fall significantly until new pipelines are built in 2012 or 2013.
"I think people are realizing now that the world has changed--so long as the current supply and demand picture remains, we will continue to see Brent at a premium to WTI," said Glen Ward, head of retail derivatives at London Capital Group. "The world prices its oil off Brent and WTI is essentially a local crude."
The new dynamic between Nymex futures and Brent has forced big energy producers and consumers to re-evaluate how they use futures contracts to protect against price changes. And the failure of markets to naturally bring prices closer together has left Nymex operator CME Group Inc. (CME) defending the viability and effectiveness of their products.
Historically, Nymex futures, known as West Texas Intermediate, was viewed as the more reliable oil price indicator because it is traded in greater volumes. But interest in Brent has grown since the Cushing glut has caused Nymex oil prices, known in the market as WTI, to decouple from the global market.
Delta Air Lines Inc. (DAL) and oil producers in Brazil and Colombia have switched from trading WTI to Brent, among others.
Trading volumes are starting to reflect a growing embrace of Brent, though WTI still has the edge. IntercontinentalExchange Inc. (ICE) reported a 23% rise in trading volumes of Brent compared to a year earlier. CME reported a 14% decrease in WTI volumes over the same period.
WTI has more outstanding contracts than Brent, which CME argues is a better measure of long-term faith in Nymex futures.
"In the long term, volume is very important, but month-to-month it can be up and down" said Bob Levin, managing director of product development at CME.
ICE was unavailable to comment.
-By Sarah Kent and Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; firstname.lastname@example.org