WTI-Brent spread narrowed again last week, positive catalyst for domestic oil producers
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- International producers receive a price closer to Brent crude while U.S.-based producers receive a price closer to WTI crude and, therefore, higher relative Brent prices favor international producers (and vice versa).
- The WTI-Brent spread continued to narrow last week from $18.90/barrel to $16.00/barrel, which is a positive in relative value for domestic producers vs. international producers.
- Despite last week’s narrowing, the spread remains relatively wide, as historically the two crudes have traded at par.
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 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 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 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 being produced internationally.
The WTI-Brent spread continued to move narrower on the week; however, it still remains relatively wide. On Friday 3/15, WTI traded $16.00/barrel below Brent compared to the prior week’s closing spread of $18.90/barrel. Over the past several weeks the spread has gradually narrowed by a few dollars per barrel.
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|
|4Q12 Realized Oil Prices Per Barrel|
|Chesapeake Energy (CHK)||$88.44|
|Concho Resources (CXO)||$81.28|
|Range Resources (RRC)||$82.30|
|Oasis Petroleum (OAS)||$86.82|
|Total Corp. (TOT)||$106.40|
Investors may want to monitor the spread; as it widens, it 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 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 last week’s short-term positive catalyst 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 holding primarily large-cap energy stocks with significant international exposure.