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Must-know: The WTI-Brent oil spread reacts to falling crude prices

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WTI and Brent used to trade closer, but prices have diverged over the past few years

The spread between West Texas Intermediate (and WTI) and Brent crude represents the difference between two crude benchmarks. WTI represents the price oil producers receive in the U.S. and Brent represents the prices received internationally. The two crude oils share a similar quality. However, off late, the prices have differed greatly between the two crudes because the recent production surge in the U.S. caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is priced. This created a supply and demand imbalance at the hub, causing WTI to trade lower than Brent.

WTI Brent Jan-06 to Jan-14

WTI-Brent widened last week

The WTI-Brent spread closed at $7.85 per barrel on Thursday, July 31, compared to $6.3 per barrel at the prior week’s close. The spread widened despite a crude oil inventory level decrease that was more than the analysts’ expectations

Both grades of crude fell last week. But WTI decreased more due to:

  • A fire in a Kansas refinery, causing the refinery to shut down and therefore threaten crude demand
  • A strong dollar, making dollar-priced oil commodities more expensive for foreign currency holders and thereby reducing demand
  • An increase in gasoline stockpiles, also causing WTI to trade lower

A wider spread causes domestic oil producers like Chesapeake (CHK), Concho Resources (CXO), Range Resources (RRC), and Oasis Petroleum (OAS) to realize lower prices on oil compared to international producers. Most of these companies are components of the Energy Select Sector SPDR ETF (XLE).

WTI Brent Jun-13 to Jun-14

Outlook

The increased transportation capacity from Cushing to demand centers like refineries on the Gulf Coast is bullish for WTI crude oil prices.

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Also, as you saw in the previous part of this series, stocks at Cushing continue to decrease. Since the beginning of 2014, weekly crude inventory at Cushing, Oklahoma, has fallen from 40.7 million barrels to 17.9 million barrels for the week ending July 25. This could bring WTI and Brent prices closer together.

Natural gas

The next part of the series will cover changes in natural gas inventory levels and natural gas prices.

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