By Dan Strumpf Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The price of Brent crude oil is getting ahead of itself.
Widely cited in Europe and lately deemed a better barometer of the global supply-and-demand balance, Brent crude oil came to prominence after its price began to outpace the price of the U.S. oil benchmark--often referred to as West Texas Intermediate--on the New York Mercantile Exchange early this year.
But now, oil prices on the Nymex are falling, as expected, on cues that the economy of the U.S., the world's largest oil consumer, is sputtering.
Brent prices are staying defensive, and traded $22.99 a barrel more than Nymex futures--a record--on Wednesday compared with a premium of $3 at the end of last year. On Monday, what is known as the spread between the two contracts was $19.68.
Recently, Nymex oil was 0.1% lower on the day at $92.90 a barrel, having fallen through its 200-day moving average due to uncertainty in the euro zone surrounding Greece's sovereign debt, while Brent was 0.6% lower at $112.41.
"[Brent's] having a life of its own," said Olivier Jakob, head of the Swiss energy consultancy Petromatrix.
Localized supply issues are largely behind Brent's recent strength.
The North Sea's Buzzard oil field, one of the biggest to feed into the Brent blend of North Sea crude oils, has been beset with production problems in recent months. The civil war in Libya and resurgent violence in Nigeria have reduced oil exports, leaving European customers looking to the North Sea for supplies instead.
Taken together, those factors have inflated the price of Brent versus other crude oils in recent weeks.
"It's a number of factors that we've seen through the year coming together," said David Greely, head of energy research at Goldman Sachs in New York.
The U.S. benchmark had been held back for months by a flood of oil piling up at its delivery point in Cushing, Okla. As the price of Brent raced ahead, some major oil producers and consumers declared the price of Brent to be the "true" measure of global oil prices, and Nymex futures to be merely a regional benchmark.
A spokesman for IntercontinentalExchange Inc. (ICE), which oversees the Brent contract, declined to comment.
One sign of the market's realignment with the Nymex contract is the recent behavior of regional crude-oil prices, which reflect what refiners and traders are willing to pay for actual barrels. These physical-market transactions, which give the best indication of price for a certain time and location because they represent incremental supply and demand, suggest that Brent prices are higher than they should be.
On the U.S. Gulf Coast, Light Louisiana Sweet crude oil recently traded at a discount of about $5 to Brent, compared with a premium of $2 a month ago. Oman crude-oil futures, traded on the Dubai Mercantile Exchange, trade at a $9 discount to Brent, double the discount of two weeks ago.
The Nymex contract's discount to Brent has forced Nymex operator CME Group Inc. (CME) to defend its flagship contract and sent producers and consumers reworking the way they use the oil market. It has also prompted critics to deem Brent as the more-accurate global benchmark.
Brent's recent strength, however, has tested that claim. With the European contract also beholden to localized supply issues, there may be no single oil contract that fully captures the state of global oil supply and demand.
"What they're reflecting is the relative supply and demand for crude in their specific regions," said Lawrence Eagles, oil analyst at J.P. Morgan in New York. "You've never been able to look at one benchmark and get a picture of the world."
-By Dan Strumpf, Dow Jones Newswires; 212-416-2818; dan.strumpf@dowjones.com.
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