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WTI-Brent Diverges: Bad News for US Upstream Companies

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Jul. 1 2015, Updated 10:06 a.m. ET

WTI-Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil widened in the June 26 week—compared to the week before. The differential as of Friday, June 26 was $3.63 per barrel—compared to $3.41 per barrel as of Friday, June 19.

Both crude oil benchmarks were weighed down by the bearish crude oil inventory report released by the EIA (U.S. Energy Information Administration). Read Part 1 in this series for a detailed discussion on last week’s crude price movements.

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WTI-Brent spread’s movements

The WTI-Brent spread has significantly converged since February—when the differential had widened to ~$12 per barrel—to levels near ~$3.63 per barrel last week. In January, they were trading near parity. This shows how volatile the global oil markets have been over the last few months.

Who gains and who loses?

A wider WTI-Brent spread is negative for US oil producers like Oasis Petroleum (OAS), Hess (HES), Cimarex Energy (XEC), and Anadarko Petroleum (APC). A wider spread generally means that US producers receive less money for their crude output—compared to their international counterparts. All of these companies are part of the iShares US Energy ETF (IYE). They account for ~4.2% of IYE.

A wider spread also demotivates US producers to pump more crude oil. This is negative for MLP (master limited partnership) companies like Plains All American Pipeline Partners (PAA). It transports crude oil.

In contrast, US refiners like Phillips 66 (PSX) benefit from a wider WTI-Brent spread. In this case, they get access to cheaper crude versus refiners elsewhere. Also, these companies get international prices—benchmarked to Brent crude—for their refined products. Refined products don’t have export impositions. So, a wider spread enhances refiners’ profitability.

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