How Much Is Oil Really Worth?

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Feb. 18, 2009

How much does a barrel of oil cost?

No, really. Is crude oil in the mid-$30s per barrel, or in the low-$40s? Both, it turns out. Which makes it increasingly difficult to figure out the headline price of crude, the world's heaviest-traded commodity.

March crude futures traded in New York took a beating Tuesday, and were mired below $35 a barrel before closing just above. But that contract expires soon - and the more-heavily traded April contract is worth $38.58.

Oil traded in New York historically is more expensive than European Brent crude, but lately it's just the opposite. Brent also fell Tuesday, but not as much as U.S. futures, leaving Brent at about $40 a barrel-a premium of about $5 a barrel.

Oil from OPEC's 12 producing nations should be cheaper than both U.S. and European crude, reflecting its lower quality. Instead, it's more expensive than either - the basket price for OPEC's 12 varieties of oil was at $41.49 Tuesday, down just a smidgen from Friday.

Which one should we look at when we talk about "oil prices?" Proponents of using U.S. West Texas Intermediate figure it's still the best global benchmark. The U.S. is the biggest oil-consuming nation, and trading volumes for New York crude dwarf other varieties. Brent supporters figure that oil's global reach make it a more reliable benchmark. And OPEC does account for 40% of global oil production, making the price of OPEC oil somewhat important, too.

The problem is that U.S. oil prices are under pressure from more than just a dismal economy and weak demand. There's a glut of WTI filling up storage tanks in Oklahoma, which makes U.S. oil a buyer's market and not a very good indication of the true, global price of oil, argue the folks at Barclays Bank:

"The combination of the $8 March-April spread, the $10 Brent-WTI spread and the premia to WTI commanded by Gulf Coast crudes are all strong indications that WTI is not currently even a good benchmark for the totality of the U.S. market, let alone the global market [The price of Brent crude provides] a better description of the global dynamics."

Why does it matter? Oil prices are so closely watched because they're meant to be the market's distillation of all available information on oil supply and demand and the pulse of the global economy, which is overwhelmingly driven by oil. When crude's different benchmarks are so at odds with each other, it makes it that much tougher to get a read on where that economy is really headed.

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