Domestic producers hurt by continued widening of WTI-Brent spread
The spread between West Texas Intermediate (WTI) and Brent crude represents the difference between two different crude benchmarks, with WTI being more representative of the price that US oil producers receive and Brent being representative of the prices received internationally. In brief, the prices differ between the two crudes because a recent surge in production in the United States has caused a buildup of crude oil inventories at Cushing, Oklahoma where WTI is priced, and there currently is a supply influx at that point without enough output crude transportation. Before this increase in US oil production, the two crudes had historically traded in-line with each other. The below graph shows WTI-Brent spread over the past few years. Note that when the spread moves wider, it means that crude producers based in the US receive relatively less money for their oil production compared to their counterparts that are producing internationally.
The WTI-Brent spread moved wider on the week, continuing the prior week’s trend. On Friday 2/1, WTI traded $18.99/barrel below Brent compared to the prior week’s closing spread of $17.40/barrel. The below graph displays the historical WTI-Brent spread.
One major driver behind the widening of the spread was because of capacity cuts on the Seaway Pipeline. The Seaway Pipeline is a 50/50 joint venture between Enterprise Products Partners (EPD) and Enbridge Inc (ENB). It includes a 500-mile pipeline between Cushing, Oklahoma (a major inventory hub for crude oil) and Freeport, Texas, as well as a terminal and distribution crude oil network in Texas City, Texas. In early January, the capacity of the pipeline was expanded from 150,000 barrels per day to 400,000 barrels per day which drove spreads to compress from ~$19.00/barrel at the beginning of January to as low as ~$15.00/barrel in mid-January. However, on January 23, Enterprise had to reduce the flow on the pipeline to 175,000 barrels a day because of limitations at the terminus. The company stated that it would build another pipeline to alleviate bottlenecks, however, it would not be finished until late 2013.
The effect of a wider spread means that companies with oil production concentrated in the US will realize lower prices compared to their international counterparts. For example, see the below table for a comparison of oil prices realized by US-concentrated companies versus companies with a global production profile.
| 3Q12 Average Price Per Barrel | |
| BENCHMARK OIL PRICES | |
| West Texas Intermediate | $92.10 |
| Brent | $109.50 |
| 3Q12 Realized Oil Prices Per Barrel | |
| DOMESTIC PRODUCERS | |
| Chesapeake Energy (CHK) | $90.79 |
| Concho Resources (CXO) | $88.13 |
| Range Resources (RRC) | $83.08 |
| Oasis Petroleum (OAS) | $83.71 |
| INTERNATIONAL PRODUCERS | |
| Total Corp. (TOT) | $107.60 |
| ConocoPhillips (COP) | $102.72 |
| Royal Dutch Shell (RDS.B) | $102.58 |
Investors may want to monitor the spread as a wider spread may make international producers more attractive to domestic producers. Note that market participants and energy experts expect the difference between WTI and Brent to decrease as many midstream energy companies are working on infrastructure to help transport landlocked US crude to international markets. For example, Marathon Petroleum (MPC) recently announced that it would reverse its Capline pipeline to transport oil from the Midwest to the Gulf Coast. US refineries are also working on capacity additions so that they can run more WTI through their facilities. The difference between Brent and WTI has caused domestic producers such as the ones mentioned in the above table (CHK, CXO, RRC, OAS) to realize lower prices on oil compared to international producers. Many of these names are also components of the Vanguard Energy Fund (VDE), an ETF whose holdings consist of large, medium-size, and small US companies in the energy sector.
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