Why Investors Should Watch the Brent-WTI Spread
On April 11, 2017, WTI (West Texas Intermediate) crude oil (UCO) (USO) (OIIL) (USL) active futures were trading at a discount of $2.83 per barrel to Brent crude oil (BNO) active futures. On April 4, 2017, the spread was at $3.14 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 the rising US supply, could explain why the Brent-WTI spread expanded.
Recently, the spread has narrowed despite talk of OPEC extending its cuts to 2H17 and record high US crude oil inventories as the US inventory situation looks set to reverse. US refiners are increasing their capacity utilization, and US gasoline demand seems to be on the rise.
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 imports from Canada caused a rise in North America’s supply. Previously, US crude oil couldn’t be exported. Plus, 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, which was 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.
Why watch the Brent-WTI spread?
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 have averaged levels that are ~85.1% higher than they were during the same period in 2016.