Persistently wide WTI-Brent spread favors international producers
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 the other 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. This has created a supply/demand imbalance at the hub causing WTI to trade lower than Brent. 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 narrower on the week, however, still remains very wide. On Friday 2/22, WTI traded $20.97/barrel below Brent compared to the prior week’s closing spread of $21.25/barrel.
The spread has been range-bound over the past several weeks. However, from mid-January to early February the spread widened significantly, due mainly to capacity cuts on the Seaway Pipeline as seen in the graph below.
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 (the inventory hub where WTI crude oil is priced) and Freeport, Texas, as well as a terminal and distribution crude oil network in Texas City, Texas. Recently, 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. On February 15, Enterprise stated that Seaway volumes would average 295,000 barrels a day between February and May which may have been a catalyst for this week’s slight narrowing in the WTI-Brent spread.
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.
| 4Q12 Average Price Per Barrel | |
| BENCHMARK OIL PRICES | |
| West Texas Intermediate | $88.17 |
| Brent | $110.13 |
| 4Q12 Realized Oil Prices Per Barrel | |
| DOMESTIC PRODUCERS | |
| Chesapeake Energy (CHK) | $88.44 |
| Concho Resources (CXO) | $81.28 |
| Range Resources (RRC) | $82.30 |
| Oasis Petroleum (OAS) | $86.82 |
| INTERNATIONAL PRODUCERS | |
| Total Corp. (TOT) | $106.40 |
| ConocoPhillips (COP) | $103.08 |
Investors may want to monitor the spread as a wider spread may make international producers more attractive relative 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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