Is Oil on the Verge of Collapse?

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Part 6
Is Oil on the Verge of Collapse? PART 6 OF 6

How the Brent-WTI Spread Impacts Energy Investors

Brent-WTI spread

On March 14, 2017, WTI (West Texas Intermediate) crude oil (UCO) (USL) (OIIL) (SCO) active futures were trading at a discount of $3.2 per barrel to Brent crude oil (BNO) active futures. On March 7, 2017, the spread was at $2.78 per barrel.

How the Brent-WTI Spread Impacts Energy Investors

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Since OPEC’s (Organization of the Petroleum Exporting Countries) deal in November 2016, the spread has risen significantly. A reduction in global crude oil supply outside the US—driven by the OPEC cuts—accompanied by the rising US supply could explain why the Brent-WTI spread has expanded.

What impacted the Brent-WTI spread?

Historically, WTI and Brent crude oil have traded close to each other, but WTI is easier to process. It’s also produced in the US—the world’s largest demand center—and so WTI had previously, for the most part, traded at a small premium to Brent.

Around 2011, US oil production started booming due to high prices and technological advances unlocking its vast shale deposits. Along with rising imports from Canada, this caused a rise in supply in North America. But US crude couldn’t be exported previously. On top of that, there wasn’t enough transportation capacity to get the booming inland supplies to the main demand center for oil on the US Gulf Coast. The US Gulf Coast has most of the US refining capacity.

A thickening plot

By October 2011, US crude oil production rose to 5.86 million barrels per day—the highest level since July 2002. During this time, countries like China gained dominance as demand centers for crude-oil-derived fuels. In October 2011, WTI crude oil active futures traded at a discount of $27.88 per barrel compared to Brent oil active futures—a record level.

After various oil pipeline projects became functional in 2013, the spread gradually narrowed. The US removed the ban on domestically produced oil exports in December 2015. As a result, the Brent-WTI spread flipped into negative territory for the first time in five years. On January 15, 2016, WTI crude oil active futures traded at a premium of $0.48 to Brent crude oil—the highest since August 16, 2010.

Why does the Brent-WTI spread matter to you?

The spread between Brent crude oil (BNO) and WTI crude oil (UWTI) prices impacts US upstream producers (XOP), midstream transporters (AMLP), and downstream refiners (CRAK).

When US WTI crude oil is cheaper than Brent crude oil, it means that US upstream producers receive less money than their international counterparts for each barrel of oil they produce. However, the situation is more profitable for downstream US refiners because their input cost is lower in such a situation.

If WTI’s discount to Brent is deep enough to cover shipping and transportation costs, it could also be an opportunity for upstream or midstream companies to seek higher prices outside North America through exports.

So far in 2017, US crude oil exports are ~57.2% higher than they were during the corresponding period in 2016.


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