Brent-WTI Spread Drives Energy Stocks
On April 18, 2017, WTI (West Texas Intermediate) crude oil (UCO) (USO) (OIIL) (USL) active futures were trading at a discount of $2.48 per barrel to Brent crude oil (BNO) active futures. On April 11, 2017, the spread was at $2.83 per barrel.
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Although far below its 2011 peak, the Brent-WTI spread has risen since OPEC’s (Organization of the Petroleum Exporting Countries) deal in November 2016. A reduction in global crude oil supply outside the US, driven by OPEC’s cuts and accompanied by rising US supply, could explain why the Brent-WTI spread expanded.
Recently, the spread narrowed as Saudi Arabia fueled doubts about OPEC extending its cuts to 2H17. US crude oil inventories look like they’re coming off highs.
What impacted the Brent-WTI spread?
Historically, WTI and Brent crude oil have traded close to each other, but WTI crude oil is easier to process. It’s also produced in the US—the world’s largest demand center. For the most part, WTI previously traded at a small premium to Brent.
Around 2011, US oil production started booming due to high prices and technological advances that unlocked its vast shale deposits. Rising production from Canada also contributed to a rise in North America’s supply. Previously, US crude oil couldn’t be exported. Also, there wasn’t enough transportation capacity to get booming inland supplies to the main demand center for oil on the US Gulf Coast, which has most of the US refining capacity.
By October 2011, US crude oil production rose to 5.9 million barrels per day—the highest level since July 2002. In the meantime, countries such as 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 high.
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.
How does the Brent-WTI spread drive energy stocks?
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 this 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 averaged levels that are ~84.9% higher than they were during the same period in 2016.