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WTI-Brent spread closed under $8/barrel last week, down over 60 percent since early February

2013.05.12 - WTI-Brent Differential 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 $8.58/barrel to $7.87/barrel. The spread has decreased in the past twelve of thirteen weeks.
  • The past three months of movement in the spread have been a medium-term positive for domestic producers relative to international producers as U.S. producers tend to receive prices more closely linked to WTI.
  • On Friday, the spread closed to its narrowest level since December 2011. From a long-term perspective, the spread remains relatively wide, as historically the two crudes had traded at par. When the spread was trading at ~$20/barrel, many market commenters expected the spread to close in. At current levels, there are mixed opinions on where the spread will trade in the medium-term.

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 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 U.S. oil production, the two crudes had historically traded in-line with each other. The above 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, from $8.58/barrel to $7.87/barrel. The spread has moved narrower for twelve of the past thirteen weeks. In early February, WTI traded at points as much as ~$23/barrel below Brent crude, but the spread has steadily narrowed since then to trade at current levels of under ~$8/barrel. The medium-term spread tightening has been a positive for domestic oil producers (relative to international producers), as it means that the discount they receive to international crudes has been decreasing. From a long-term perspective (5+ years), the spread is wide as WTI and Brent crudes have historically traded roughly at par.

When the spread was trading at its widest point, most market participants thought that it would close-in in the medium-term. However, given that the spread now trades at under ~$8/barrel, some feel the spread may remain where it is or widen back out from here. For example, the EIA (U.S. Energy Information Administration) notes in its monthly report titled “Short Term Energy Outlook” that it expects the spread to average $12.72/barrel in 2013. Year-to-date it has averaged ~$15.50/barrel, and roughly 35% of the year has elapsed which implies that the rest of the year the spread will average ~$11.25/barrel and will therefore widen from current levels.

2013.05.12 - WTI-Brent DifferentiaEnlarge Graph

Again, 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.

1Q13 Average Price Per Barrel
BENCHMARK OIL PRICES
West Texas Intermediate $94.36
Brent $112.64
1Q13 Realized Oil Prices Per Barrel (excluding hedge gains/losses)
DOMESTIC PRODUCERS
Chesapeake Energy (CHK) $95.23
Concho Resources (CXO) $82.49
Range Resources (RRC) $85.46
Oasis Petroleum (OAS) $93.33
INTERNATIONAL PRODUCERS
Total Corp. (TOT) $106.70
ConocoPhillips (COP) $105.97

 

Investors may want to monitor the spread as a wider spread may make international producers more attractive relative to domestic producers. 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 with holdings primarily in large-cap energy stocks with significant international exposure.