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Brent Crude to be the international standard, US gasoline prices will rise

ICE, LUV, DAL

The reign of West Texas Intermediate WTI light sweet crude as the international standard for Crude Oil pricing has been eroding for a few years. It is now certain that WTI will be replaced in Y 2013 by Brent Crude as the international standard.

The S&P GSCI commodities index has already raised its weighting on Brent to 22.34% of the index beginning in January, and lowered the weighting of WTI from nearly 31% to 24.71%. The reason: there are more Brent bbls available. Higher volume means more liquidity and more opportunities for trading.

The problem with WTI is that it is landlocked within the US, and pricing is settled at Cushing, Oklahoma, where there is limited pipeline availability to move WTI.

Virtually no WTI is loaded on tankers for sale anywhere else in the world, and notwithstanding recent projections from the International Energy Agency, it is not likely that significant volumes of WTI will ever be sold abroad.

The situation is even more lopsided in futures, where Brent futures traded on the InterContinental Exchange (NYSE:ICE) now outnumber WTI futures traded on the Nymex by about 30,000 contracts a day. The combined volumes on both exchanges still favors WTI, but Brent is rapidly closing the gap according to the data.

The options market is where Brent has made its largest gains although it still trails WTI by a substantial margin, both Southwest Airlines Co (NYSE: LUV) and Delta Air Lines Co. (NYSE: DAL) have switched to Brent to hedge their exposure to jet fuel prices.

Brent trades today at a spread of about $23 bbl higher than WTI.

That gap, due in large part to increased production in the US and a lack of infrastructure to move WTI out of the Midwest, is expected to close with WTI prices rising to meet Brent pricing.

Crude Oil producers will welcome the shift, refiners will not, and US drivers will end up paying higher prices at the pump. It may take a while for this all to shake out, but the 1st big step has already been taken.