London, 29 March 2011

Standard Bank: Since the beginning of this year, WTI and Brent have diverged significantly on the back of storage concerns at Cushing, the WTI delivery point. Year-to-date, front-month Brent has gained over 20%, while front-month WTI has only gained 13%. Oil products have largely been tracking Brent instead of WTI. "Consequently, fuel hedgers are shifting to Brent for their hedging to seek for better protection," according to James Zhang at Standard Bank.

"It’s been reported lately that a number of airlines have moved their jet-fuel hedge from WTI to Brent. As a lighter cut in the middle distillate product group, jet fuel is typically traded at a premium to the ICE Gasoil in Europe and the Nymex Heating oil in the US.

"Due to lack of liquidity for jet fuel contracts, airlines tend to hedge their jet consumption using crude, gasoil and heating oil. As shown in in the accompanying graph, Nymex heating oil has been tracking Brent much more closely than WTI, therefore, it provides a better hedge for consumers. Other oil products, such as gasoline and diesel, also track Brent much more closely than WTI."

As of yesterday’s close, the spread between front-month WTI and Brent was $10.78/ bbl. "Given the Cushing storage situation, it’s likely that this wide spread between Brent and WTI will stay for a prolonged period of time," says Zhang.

"Consequently, we might see further shifts in hedging activities from WTI to Brent. This underpins the increasing trading volume in Brent contracts on ICE. This emerging pattern has to be taken into account when examining market data, such as US CFTC reports, which is largely WTI-focused."

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