This is a chart of something which cannot last. I can’t believe how long it has lasted already. This chart shows gasoline prices vs. oil prices. You can see they track each other quite well, until a few years ago. By my calculations, gasoline would have to fall $0.74 to match the current price of oil. This would imply another $100bn in consumer spending could hit the economy if this happens.
Here is the problem with this switch to using Brent as the world benchmark. Chris Cook points out the Brent Market is totally and completely manipulated.
“North Sea crude oil production has been in secular decline for many years, and even though the North Sea crude oil benchmark contract was extended from the Brent quality to become BFOE, there are still only about 70 cargoes, each of 600,000 barrels, of North Sea oil which come out of the North Sea each month, worth at current prices about $2.5 billion. It is the price – as reported by Platts – of these cargoes which is the benchmark for global oil prices either directly (about 60%) or indirectly (through BFOE/WTI arbitrage) for most of the rest.”
Wow. If there are only 60 cargos, how many of them are delivered against the futures contract? How are the prices for the Brent futures contract settlement decided? Well, for a Brent contract, you’ll need to take actual delivery of the oil, and taking delivery of 600,000 barrels of oil might be problematic for someone, because the cost would be about $50,000,000 per tanker @$80 per barrel.
There is no compelling mechanism which links the 60 transactions per month with the brent crude futures settlement price.
If you want to find out who really has an interest in rigging the market, ask who benefits from medium- and long-term high commodity prices: it’s the producers, stupid. From De Beers’ diamond hoarding to coffee-grower cartels, if the history of commodity markets tells us anything it’s that if producers can find leverage to support commodity prices, they will.
It’s a good trick. Can this really be true?
It’s only $4bn of oil delivered each month. Imagine you are Saudi Arabia, and you wanted to support the price of oil. You produce 9,000 barrels a day, worth about $250bn a year. You could spend at most extra $12 billion a year to buy the entire BFOE production, and you gain $250*.2 = $50bn per year. That’s if you bought every single tanker.
Of course, you don’t have to buy every tanker. Really, you probably only need to buy 3-10 cargoes a month, or even just put a strong bid underneath the market. Many other producers have a vested interest in keeping prices high too, so they buy a few too, put in strong bids.
It’s just a few but gigantic transactions a month. 3 Transactions on an average day, worth millions each, for delivery of a huge amount of a specialty product, which set the price of gasoline in the United States. Not many people can even afford to play in this market.
You can see in the chart where we moved from a WTI (West Texas Intermediate) benchmark to a Brent Crude. It’s where the price of U.S. gasoline diverged from the price of WTI.
But over time, this divergence cannot last. It only exists now because there is no way to arbitrage the WTI and brent crude.