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 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 US receive relatively less money for their oil production compared to their counterparts that are producing internationally.
The WTI-Brent spread widened last week, from $7.87/barrel to $8.35/barrel. Prior to last week, the spread had 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 had steadily narrowed since then to trade at current levels of ~$8/barrel. Last week, the spread widened slightly, however, over the medium term the spread has tightened significantly. This 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 very 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 roughly ~$8/barrel, some feel the spread may remain where it is or widen back out from here. For example, the EIA (US 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.
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.
|1Q13 Average Price Per Barrel|
|BENCHMARK OIL PRICES|
|West Texas Intermediate||$94.36|
|1Q13 Realized Oil Prices Per Barrel (excluding hedge gains/losses)|
|Chesapeake Energy (CHK)||$95.23|
|Concho Resources (CXO)||$82.49|
|Range Resources (RRC)||$85.46|
|Oasis Petroleum (OAS)||$93.33|
|Total Corp. (TOT)||$106.70|
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 whose holdings is primarily large-cap energy stocks with significant international exposure.
© 2013 Market Realist, Inc.
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