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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. 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 slightly wider on the week, from $11.42/barrel to $11.82/barrel. This past week’s spread widening followed eight consecutive weeks of narrowing. The spread was as wide as ~$23/barrel as recently as early-February and narrowed to ~$11/barrel last week. The medium-term spread tightening has been a positive for domestic oil producers, as it means that the discount they receive to international crudes has been decreasing. From a long-term perspective, the spread is wide as WTI and Brent crudes have historically traded roughly at par.
Again, the effect of a wide 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|
|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 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 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, and despite the 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 whose holdings is primarily large-cap energy stocks with significant international exposure.
© 2013 Market Realist, Inc.