Gap between WTI and Brent crudes closes narrower for seventh consecutive week

2013.03.29 - WTI Brent LTEnlarge Graph

  • International producers receive a price closer to Brent crude while U.S.-based producers receive a price closer to WTI crude, therefore, higher relative Brent prices favor international producers (and vice versa).
  • The WTI-Brent spread continued to decrease last week from $13.95/barrel to $12.79/barrel, the seventh week in a row that the gap narrowed. This is a positive for domestic producers relative to international producers as U.S. producers tend to receive prices more closely linked to WTI.
  • This is the narrowest point that the spread has reached since June 2012. The spread remains relatively wide, as historically the two crudes traded at par. However, many market analysts expect the spread to continue to close in as expanded takeaway capacity for landlocked U.S. crude is put into place.

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 U.S. 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 in 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 U.S. oil production, the two crudes had historically traded in-line with each other. The below graph shows the WTI-Brent spread over the past few years. Note that when the spread moves wider, it means that crude producers based in the U.S. receive relatively less money for their oil production compared to their counterparts that are producing internationally.

The WTI-Brent spread continued to move narrower on the week, however, still remains relatively wide. On 3/28, WTI traded $12.79/barrel below Brent compared to the prior week’s closing spread of $13.95/barrel. Over the past seven weeks the spread has narrowed from ~$23/barrel to ~$13/barrel.

2013.03.29 - WTI Brent STEnlarge Graph

The effect of a wide spread means that companies with oil production concentrated in the U.S. will realize lower prices compared to their international counterparts. For example, see the below table for a comparison of oil prices realized by U.S.-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; 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 continue to decrease as many midstream energy companies are working on infrastructure to help transport landlocked U.S. 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. U.S. refineries are also working on capacity additions so 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, and despite the past seven week’s medium-term positive catalyst (from the view of domestic producers) of a narrower spread, from a longer-term perspective the spread remains wide. Therefore, international producers receive significantly more revenue per barrel than domestic producers. Additionally, many international names can be found in the XLE ETF (Energy Select Sector SPDR), an ETF with holdings primarily in large-cap energy stocks with significant international exposure.