The contango is widening, floating storage is on the increase, and Brent’s premium to WTI is intensifying by the day which means only one thing: stocks at Cushing, the physical delivery point for the WTI  Nymex contract, must be reaching a critical level (again).

Harry Tchilinguirian, commodities analyst at BNP Paribas, wonders if the above means the market should now expect a return of the extreme pricing relations of Q1′ 09, when WTI’s relevance as a benchmark began to be questioned due to the extreme disparities that appeared between it and Brent crude prices.

"WTI’s historical premium relative to Brent has an economic function: that to offset transportation costs and attract a light-sweet crude oil westwards during the US summer driving season. Among the main reasons behind the increase in the relative price is that historically, the marginal US refiner left to meet gasoline demand at the seasonal high point of consumption was less complex in its operations.

As such, the simple refinery would seek a lighter grade of crude to maximise its output of gasoline. This year, there is no summer driving season as a high unemployment rate undermines US consumer confidence. Additionally, with increases in conversion capacity in the past couple of years, the need to rely on the marginal Brent-related barrel to meet light product demand has lessened in favour of more medium quality crude."

See the full article with charts from the FT: http://ftalphaville.ft.com/blog/2009/08 … -on-brent/