Oil behind a bottleneck

WTI and Brent are two major crude-oil benchmarks. West Texas Intermediate is priced at a storage hub in Cushing, Oklahoma; Brent comes from the North Sea. The oils are similar, though not identical, and for decades they traded within a few dollars of each other. When one got cheap, traders bought it and shipped it to where the other sold. That arbitrage kept the prices close.

In early 2011 it stopped working. U.S. production was rising, crude poured into Cushing, and the tanks there filled up. There was too little pipeline capacity to move oil from Cushing to Gulf Coast refineries; the main line between them, Seaway, actually carried oil north into the hub. Oil that couldn't leave couldn't be arbitraged.

The shaded area is Brent's premium over WTI. It opened in February 2011, when Libya's civil war took its crude off the world market and lifted Brent, while landlocked WTI couldn't follow. At its widest, on September 23, 2011, Brent traded at $109.17 and WTI at $79.58, a gap of $29.59 between similar barrels. From early 2011 through 2012 the gap averaged about $17, according to the St. Louis Fed.

Relief came in stages. Seaway was reversed in May 2012 to carry crude south, but the chart shows the gap barely closed at first: the reversed line started with limited capacity, and oil kept arriving in Cushing faster than new routes opened. The spread narrowed through 2013 as more pipeline capacity came online, and settled around $6–10 by early 2014.

A global commodity can have sharply local prices when transportation can't connect its markets.