Sea Change in Pricing of Oil Coming

NEW YORK (TheStreet) - The historic disconnect between West Texas Intermediate, the global oil benchmark traded at the Chicago Mercantile Exchange(CME), and Brent crude oil, the relative "upstart" traded at the IntercontinentalExchange(ICE), is more, I think, than a temporary realignment.

I think it marks a sea change in the benchmark pricing of global oil, most certainly to the benefit of the European Brent grade but not entirely so. It is becoming clear that no one benchmark, whether U.S. or foreign, is any longer capable of describing what's happening in oil. And that is a big deal for the future of oil pricing and the future of your energy portfolio.

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Oil is unique, unlike any other commodity because there are literally hundreds of grades of the black gold. No one is exactly the same as the other; they can vary in many ways, but most significantly in their sulfur content.

Sweet grades, like WTI and Brent, have less sulfur and are easier to refine and therefore generally more expensive and in demand. Sour grades, like Mars, Omani and Dubai crudes are more plentiful and generally the supply benchmarks in Asia.

Financially speaking, however, the huge growth of financial oil left the many separate physical grades of oil behind decades ago. For ease, liquidity and access, all of "oil" has been financially accessed using the futures-based global benchmark of WTI, which I traded for almost 25 years on the New York Mercantile Exchange, now owned by the CME, with Brent crude, first traded at the IPE and now owned by the ICE lagging far behind.

Indeed, real physical oil began to be priced in the many unique markets using the WTI benchmark, with some producers and end-users sometimes opting to offset any differential risk with other outside 'basis" hedges.

The important takeaway is that the prices of physical oil actually paid on the cash markets was overwhelmingly controlled by the prices created at the futures market nexus -- contracts between real world users and producers refer to WTI (as do the Europeans to Brent using the Brent Weighted Average formula (BWAVE).