The divergence in the WTI-Brent spread considerably narrowed last week compared to the prior week. WTI saw support from a weaker dollar, as well as lower-than-expected growth in US production. (Read the previous part of this series for more information.) Both Brent and WTI had leaped on news of an upheaval in Yemen, only to fall back the next day. The differential narrowed to levels close to $7.5 on Friday, March 27.
Last month, the differential between the two benchmarks had widened to ~$12. Increasing domestic supplies had kept WTI from advancing as much as Brent last month. Refinery outages had also affected WTI prices.
However, it’s interesting to note that the benchmarks were trading near parity just this January.
While both the benchmarks at their current 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, some of whom are struggling to break even.
However, US refiners such as Valero Energy (VLO), Phillips 66 (PSX), Tesoro (TSO), and Marathon Petroleum (MPC) benefit from a wide spread, as they have access to cheaper crude oil versus refiners elsewhere. They also get international prices, which are benchmarked to Brent crude oil, for their refined products (which don’t have export impositions). So, a wider spread enhances their profitability.
All these companies are components of the Energy Select Sector SPDR ETF (XLE), and they make up ~10% of the ETF.
In the next part of this series, we’ll discuss the EIA’s forecasts for oil prices in 2015.