The divergence between WTI and Brent narrowed last week, as a slowdown in Cushing offered a glimmer of hope, causing WTI to rise. Brent prices saw a more profound effect, following the Goldman Sachs low price estimates. Brent fell almost 5% on Monday last week.
Last month, WTI had increased 3.1% since January 30, versus the 18% increase that Brent saw during the same period.
As a result, the divergence between the two benchmarks had widened to ~$12.
With last week’s activity at Cushing, however, the divergence is now close to $10.
However, it’s interesting to note that the benchmarks were trading near parity just this January.
At the crux of this matter is US supplies. Increasing domestic supplies have been keeping WTI from advancing as much as Brent. Refinery outages have also been affecting prices lately. Brent had been finding support in supply disruptions in Libya.
The price gap seems to be adhering the the strategy of the Organization of the Petroleum Exporting Countries, or OPEC. 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 won’t struggle as much as their US counterparts.
Therefore producers such as Chevron (CVX), ConocoPhillips (COP), and Murphy Oil (MUR) will continue to feel the heat. These companies make up 14% of the Energy select Sector SPDR ETF (XLE) and 11.5% the iShares Global Energy ETF (IXC). .
In the next part of this series, we’ll discuss the EIA’s forecasts for oil prices in 2015.