Starting in 2011, West Texas Intermediate (WTI) crude, the main US oil benchmark, traded at an increasingly deep discount to Brent, a North Sea grade that was Europe’s main oil benchmark, and more recently the world’s. For decades, these two crudes had traded near parity, plus or minus a buck or two a barrel. Several factors changed that. The biggest was the rapid growth of production from unconventional sources in the middle third of North America: shale oil and upgraded oil sands crude. From West and South Texas to North Dakota and Alberta, Canada a wave of new oil overwhelmed existing pipeline capacity, some of which was pointed in the opposite direction to carry imported crude into the mid-continent.
The enormous tank farms at Cushing, OK began to fill up. That’s a crucial part of the story, because Cushing is the principal settlement point of the WTI futures contract. The more crude that arrived at Cushing without being needed farther north or provided an exit to the south, the higher inventories rose and the more depressed the WTI price became, relative to Brent. Nothing like that lasts forever in a highly competitive industry. At a $20/bbl discount, companies pursued every possible avenue for getting oil from Cushing to the Gulf, including building new pipelines and reversing existing ones, while using rail and even trucks in the interim. This amazing episode is nearing its end, and traders are giving up on it as an opportunity for profit.