Publications: Notes at the Margin

Changing Arbitrage Relationships (September 30, 2013)


Today the United States has a huge surplus of refining capacity, most of it on the Gulf Coast. This excess will increase in coming weeks as other Gulf Coast facilities return to operation and the BP refinery in Whiting, Indiana, comes on stream. The surplus—more than a million barrels per day of products—must be exported. To find a market, the products must meet competition at the destination, implying they will sell in Gulf markets at a discount to world prices.


In turn, Gulf Coast refiners will force domestic crude oil producers, who need to find a home for their output, to accept discounts to world crude prices. This means US crude oil will sell for less than equivalent crudes delivered in the world market. WTI in Cushing has to trade below world prices because the amount Gulf producers will pay must allow for costs for shipping crude from Cushing to the Gulf and for delivering products to world markets. This week's report discusses the nature and implications of these shifting arbitrage relationships.


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