Wednesday, February 18, 2009

NYMEX oil-A broken benchmark?

WTI futures are also cheaper than prices charged by the Organization of Petroleum Exporting Countries, whose oil tends to be lower in quality and thus typically fetches a lower price.

This recent reversal in prices has prompted at least one prominent energy agency and some market analysts and investors to suggest Nymex oil is losing its influence as a global benchmark.

"Volatile WTI is sending mixed and misleading price signals not only to the market but to economic forecasters, government officials and policy makers," the International Energy Agency wrote in a report released last week.

"Further deterioration in the fragile WTI pricing mechanism would only serve to reinforce the view that the crude has become an irrevocably broken benchmark," added the Paris-based energy advisor to developed countries.

WTI's pricing anomalies have upended the crude's value as a basis for setting physical prices, the IEA noted in its report.

On Tuesday, front-month Brent futures closed at $41.03 a barrel on the IntercontinentalExchange, while front-month WTI ended at $34.93 on the Nymex.

The weakness in WTI futures has stemmed from excessive inventories at Cushing, Okla., the delivery point for Nymex futures. WTI has traded lower than Brent before, but this time the gap is particularly wide: It hit more than $10 last month, the most since Brent and WTI began trading in the futures market.

The artificially low WTI prices mean oil users could pay a much higher price than WTI when they trade physical oil with producers. It also means investors putting money in Nymex futures or oil exchange-traded funds linked with Nymex could see prices rally when Cushing inventories wane, as the Nymex contract rises back above levels of Brent and other global contracts.{00C1AF3A-52C4-44DE-860E-F8620447A9E9}

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