Over the last 12 months the price of London-traded Brent crude oil has outpaced New-York traded West Texas Intermediate crude oil (WTI) by ten percentage points. That’s a serious divergence in performance, considering both contracts trade the same commodity.

Anomalies in the commodities complex has sprouted just about everywhere since 2008 causing concerns for institutional and private investors alike; contango, backwardation, new CFTC trading limits and a rush of inflows have begun to distort some commodities and their pricing mechanisms. Not all commodity ETFs are created equally.

Indeed, some ETFs have seriously trailed their respective commodity benchmark futures contracts over the last two years because of contango or anomalies associated with futures trading.

Oil Market Challenges

In the end, investors are paying up for this participation and, in most cases, trailing commodity benchmarks they’re supposed to replicate.

The oil market poses challenges to traders and investors. Brent crude, the European benchmark for oil, closed at a $6 premium compared to WTI crude on Friday. That’s a pretty serious mark-up.

According to The Financial Times, traders blame the premium differential to the potential flood of Canadian oil likely to be stored at Cushing, Oklahoma, where the United States stores most of its supplies. A new pipeline will be operating in 2011 and that has investors worried that Cushing will be overwhelmed with over-capacity.

In Europe, Brent crude is outpacing WTI for a host of reasons, namely Russian oil supplies being increasingly diverted to Asia and a long-term decline of North Sea output.

In response to the growing performance differentials, the Standard & Poor’s GSCI, or Goldman Sachs Commodity Index, is introducing a greater percentage allocation of its vast energy constituent to Brent crude. More than any other diversified commodities benchmark, the S&P GSCI holds almost 70% of its allocation in energy futures.

Going forward, Brent crude is likely to continue outpacing WTI. Additional CFTC regulations, possible new position limits and government intervention are going to drive investors to London’s Brent contract. If you like oil, then over-weight an index in Brent.