The divergence between WTI and Brent widened last week compared to the week prior. The differential widened to $6.3 on Friday, April 10, compared to $5.81 as of Thursday, April 2.
While both the oil price benchmarks saw support from tremors in the US–Iran deal, the impact on Brent prices was more pronounced. Read the previous part of this series to learn about recent developments in the Iran deal.
While WTI saw some support from increased refinery demand, a huge inventory build, causing inventories to touch record-high numbers, pulled prices lower.
Effects of the differential
Although the differential has widened, WTI-Brent has significantly converged since February, when the differential had widened to ~$12. Increasing domestic supplies had kept WTI from advancing as much as Brent. Refinery outages had also affected WTI prices. To put this effect into perspective, consider that, in January, they were trading near parity. This change shows how volatile global oil markets have been over the last few months.
A wider WTI-Brent spread is a negative for US producers such as Occidental Petroleum (OXY) and Anadarko Petroleum (APC). A wider spread generally means that US producers receive less money for their crude oil output compared to their international counterparts. On the other hand, a wider spread is a positive for US refiners such as Valero Energy (VLO) and Tesoro (TSO).
Refiners benefit from a wide spread, as they have access to cheaper crude oil versus refiners elsewhere, and they get international prices that 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 ~11.5% of the ETF.