Remember the good old days when you could count on the famous West Texas Intermediate or WTI grade of light sweet high yielding crude oil to lead the globe and trade at a premium to its sister in the North Sea known as the Brent Blend? Well those days are gone as Brent has gone crazy leading many analysts and long time market watchers scratching their heads.

The Brent/WTI spread trade was a highlight in yesterday's trading session as the differential spread price of Brent crude oil traded $27 a barrel higher over WTI. While WTI oil fell dramatically on fears over the global economic slowdown, the Brent crude soared driving it to a record premium over the former leader of the oil price world, West Texas intermediate. Why did Brent seemed to defy the rest of the market's pessimism while WTI seemed focused on the market turmoil and increasing odds of global oil demand destruction? Does WTI have it right and has Brent just went crazy?

Yes, Brent went crazy but crazy like a fox. The truth is there are some very strong, fundamentally sound reasons for Brent trading at a premium to WTI and some real reasons why the spread extended the move to a record high yesterday. Anyone that has followed the spread should be aware of ongoing production problems in the North Sea that has tightened supplies of that sweet blend in Europe. Because of problems at oil platform North Sea Forties, crude Brent blend traded at a three year high as demand in Europe rose on a seasonal basis ahead of winter at a time when supplies have been tight and refining margins in Europe have been good. Dow Jones Newswires reported that 24 cargoes loading this month have been delayed, trading sources said on Tuesday, due to oilfield problems. In other words, there are ships waiting to pick up oil that is not even there yet.

In the past European refiners have looked to Libya as a replacement for Brent crude because of its high quality and simplicity to refine. In fact one of the reasons Brent crude gained ground on WTI in the first place was the unrest in Libya. Of course with reports that Gadhafi is seeking asylum, (Hey I thought you were going to fight to the death! You Promised!) and the rebels winning the war, there was hope that Libyan oil would rejoin the world stage rather quickly. Yet perhaps those hopes are being dashed with reports of growing factions in the rebel group and fears that the rebels may not be as ready to assume leadership and stability as many had hoped. There are rumors of reprisals and some tribal tension. These rivalries reduce the odds of the hoped for quick return to production pitting more pressure on the unstable North Sea supply.

At the same time there are fears surrounding China's oil leak and its impact on Chinese offshore oil production's. Due to a leak, Conoco Phillips has been told to shut China's biggest offshore oil field. That lack of production means China will be in the Brent market looking to replace those missing supplies. Conoco Phillips was surprised by the news and has already apologized to the Chinese government. Still they only own a 49% stake in the oil platform and China's CNNOC owns the rest. No word on whether the Chinese are apologizing. Well apology or no apology the shutdown caused a surge in Brent crude buying.

WTI on the other hand is weakened in part because they fear that economy will slow in he US and because of the big supply in Cushing, Oklahoma. Yet WTI came back a bit when the ISM nonmanufacturing reading came out much better than expected but really jumped late in the session on fear that shut production from tropical storm Lee may take longer to come back than traders had hoped. It appears that tropical storm Lee while not achieving hurricane status, is still causing havoc. As of yesterday according to The U.S. Bureau of Ocean Energy Management, 60.5% of Gulf of Mexico oil production is still offline. That is less than a 1% improvement from the day before. In other words we are currently losing somewhere in the area of 846,670 barrels a day. At the same time 46% of Gulf natural gas output is still shut in. If we don't see major improvement today then oil could get another late day kick start. What's more we still have a lot of storm activity in and around the Gulf which is making it hard for business to get back to normal as the seas and the winds continue to be rough.

The National Hurricane Center now is predicting that another storm in the Gulf of Mexico has a 40% chance of becoming a cyclone. The NHC says, A BROAD AREA OF LOW PRESSURE LOCATED OVER THE EXTREME SOUTHWESTERN GULF OF MEXICO HAS CHANGED LITTLE IN ORGANIZATION OVER THE PAST FEWHOURS...BUT SOME GRADUAL DEVELOPMENT OF THIS SYSTEM IS POSSIBLEOVER THE NEXT COUPLE OF DAYS. THIS SYSTEM HAS A MEDIUM CHANCE...40 PERCENT...OF BECOMING A TROPICAL CYCLONE AS IT MOVES LITTLE DURING THE NEXT 48 HOURS. AN AIR FORCE RESERVE HURRICANE HUNTER AIRCRAFTIS SCHEDULED TO INVESTIGATE THIS SYSTEM TODAY...IF NECESSARY. At the same time another 2 systems out in the Atlantic could wreak havoc with Gulf production later this week.

Anyone want to buy a refinery? Sunoco sent a strong message to the critics of refining buy saying they want out. Robert Campbell of Reuters wrote, Sunoco Inc bit the bullet on Tuesday, announcing it would get out of the brutally competitive oil-refining business as fast as possible and in the process possibly shut a huge chunk of the U.S. East Coast's refining capacity.... The company wants out of refining by July, which doesn't leave much time to find buyers for its 335,000-barrels-per-day Philadelphia refinery or the nearby 178,000-bpd Marcus Hook facility....At a combined 513,000 bpd, the two refineries represent nearly a third of the operable refinery capacity on the East Coast, according to the Energy Information Administration.... Once a number of idled refineries are stripped out of that number, Sunoco looks like an even bigger piece -- maybe 40 percent -- of East Coast capacity. With regional operating rates stuck at 80 percent, closures look likely. Certainly Sunoco doesn't seem to be making an idle threat. The company is taking a charge of up to $2.2 billion to write down the value of its refining business, which would appear to represent the bulk of the carrying value of the refineries. If they are sold, Sunoco clearly doesn't expect to get much for them. Moreover, management flagged that the additional charge for a full closure of both plants would be only $500 million. Much of the painful medicine is being taken up front. A closure of at least one of the plants seems likely and the shutdown of both would not be a surprise. After all, there are refineries for sale all over the United States and Europe and precious few buyers.

The only two companies buying refineries in the United States right now do not look like potential bidders. Valero has been buying refineries but bailed out of the East Coast and is unlikely to return. Privately held PBF Energy, which bought two Valero plants, may be reluctant to add to its East Coast exposure and would likely face regulatory scrutiny if it bulked up further. Other independents may be reluctant to get into a market where dwindling demand and tough competition from surplus Gulf Coast and European fuel supplies make for tight margins. Sunoco's plants face additional challenges. Both are high-cost because they generally run light, sweet, imported crude oil, which has surged in price with the decline of North Sea production. Crude costs have been lowered somewhat by switching to more acidic grades but this has resulted in longer and more expensive maintenance turnarounds. Marcus Hook also requires tens of millions of dollars of environmental upgrades by 2013 to comply with a consent decree. A meaningful portion of these expenditures has not yet been made, according to Fitch Ratings. That alone could be enough to deter buyers and kill off Marcus Hook. A must read on the Reuters Wires! And another impact from the crazy Brent Market!

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Phil Flynn
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