Crude Slips as Brent, Nymex Gap Surges

The gap between the two most widely traded oil contracts blew out to its widest level in a year Monday, as shrinking production in the North Sea kept the price of European crude elevated, though down on the day. Rising North American output weighed on prices in the U.S.

Light, sweet crude for November delivery settled 55 cents, or 0.6%, lower at $89.33 a barrel on the New York Mercantile Exchange. Brent crude, the European benchmark, settled 20 cents, or 0.2%, lower at $111.82 a barrel on the ICE Futures Europe exchange.

The gap between the contracts widened to $22.49 a barrel, the widest differential, or "spread," between the benchmarks since Oct. 19, 2011.

"They're really in two different universes," said Andy Lebow, senior vice president of energy futures at Jefferies Bache in New York. In terms of supply and demand, he said, "they're just two different markets."

Output among the four major crude-oil grades supplying the Brent contract in the North Sea will fall 13.3% to 780,000 barrels a day in November from 871,000 barrels a day in October, according to Dow Jones Newswires data based on loading programs.

The output is the smallest since September. Declining output in the North Sea has helped to support the Brent crude contract for much of the last year.

"If you've got a slowing of delivery in the North Sea, that's going to drive Brent higher," said Mark Waggoner, president of Excel Futures, a trading advisory in Bend, Ore.

The widening spread marks the latest sign of divergence between the U.S. and European oil markets. The two contracts historically have traded in lockstep, but began to split early last year and have traded roughly $10 to $20 apart ever since.

When the two contracts first came apart, traders widely blamed a build-up of oil around the Cushing, Okla., area in the central U.S. The town, a massive oil-storage hub, is the delivery point for the Nymex contract, called West Texas Intermediate. As a result, WTI--long the most widely cited oil contract--lost much of its relevance as a global price-setting benchmark as more traders saw Brent crude as more reflective of global supply and demand.

Pipeline companies responded with plans to build takeaway networks that would transport crude from the midcontinent to refiners on the Gulf Coast. In May, two companies reversed the flow of a pipeline that now brings 150,000 barrels of oil a day from Cushing to the Gulf Coast. Oil shipments via railcars surged.

The measures helped to bring the spread between Brent and WTI to under $11 a barrel in June. But U.S. production has continued to grow steadily, overwhelming the new takeaway capacity. Last week, the Energy Information Administration reported U.S. crude-oil output rose to its highest level since 1996 during the prior week. The surge in production has been fueled by rising flows from U.S. shale oil fields.

The widening spread comes amid a backdrop of weakening demand for crude oil. Oil prices were broadly pressured Monday after the World Bank cut its economic growth forecast for China, the world's No. 2 consumer of crude oil.

Front-month November reformulated gasoline blendstock, or RBOB, settled 5.94 cents, or 2%, lower at $2.8931 a gallon. November heating oil settled 1.16 cents, or 0.4%, lower at $3.1443 a gallon.