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Why the WTI-Brent Crude Oil Discount Converged Slightly

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Aug. 18 2020, Updated 5:31 a.m. ET

WTI-Brent

The divergence between WTI and Brent crude oil prices slightly narrowed compared to the prior week. Brent prices saw a more pronounced effect from the Fed’s announcement (see Part 8 of this series), and, like WTI, Brent was affected by surging US supplies.

Last month, WTI had increased by 3.1% since January 30 versus an 18% increase in Brent during the same period. As a result, the divergence between the two benchmarks had widened to ~$12.

At the crux of this matter is US supplies. Increasing domestic supplies had kept WTI from advancing as much as Brent last month. Refinery outages had also affected prices.

However, it’s interesting to note that the benchmarks were trading near parity just this January. Currently, the differential is close to $9.

The price gap seems to be adhering the Organization of the Petroleum Exporting Countries’s (OPEC’s) strategy. Last year, OPEC decided to keep its output steady in order to defend its market share.

While both the current benchmark prices are painful for oil producers, OPEC producers—whose selling prices are mostly based on Brent—shouldn’t struggle as much as their US counterparts.

Therefore producers such as Chevron (CVX), ConocoPhillips (COP) , Concho Resources (CXO), and Occidental Petroleum (OXY) will feel the heat—as OPEC intended with its decision.

CVX, COP, and OXY are components of the iShares Global Energy ETF (IXC), and they make up ~13% of the ETF.

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