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The WTI–Brent Spread Continues to Narrow

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WTI–Brent oil spread

WTI’s discount to Brent oil declined last week compared to the prior week. The differential as of Friday, May 8, was $6 per barrel, compared with $7.31 per barrel as of Friday, May 1.

Both benchmarks saw support from a weaker dollar earlier in the week, while WTI was also supported by a drop in rig counts and a bullish inventory report. We discuss this in detail in Part 1. However, a stronger dollar toward the end of last week weighed down Brent oil.

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WTI–Brent has been volatile in the past few months. It had significantly converged since February—when the differential had widened to ~$12 per barrel—to levels near $3 per barrel in the week of April 17. It had widened back to levels near $6 per barrel by last Friday. To put this into perspective, in January WTI and Brent oil were trading near parity. This shows how volatile global oil markets have been over the last few months.

A narrower WTI–Brent spread is positive for US producers such as Anadarko Petroleum (APC), Occidental Petroleum (OXY), Cimarex Energy (XEC), and Apache Corp (APA). A wider spread generally means that US producers receive less money for their crude output, compared with their international counterparts.

All these companies are components of the iShares Global Energy ETF (IXC) and make up 5.3% of the ETF.

US refiners such as Phillips 66 (PSX) benefit from a wider WTI–Spread, as they have access to cheaper crude than refiners elsewhere. These companies have access to international prices that are benchmarked to Brent crude for their refined products. Refined products don’t have export impositions, so a wider spread enhances their profitability.

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