WTI–Brent Spread Continues to Diverge: Bad for US Upstream Biz



WTI–Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil widened in the week ended July 13 over the previous week. The differential as of July 13, Monday, was $5.65 per barrel. On July 6, it was $4.01 per barrel.

Both crude oil benchmarks were hit by uncertainty in Greece, volatility in Chinese stock markets, and prolonged talks with Iran. Yet Brent started rising after taking the massive blow on Monday, July 6, while WTI continued to retreat. This explains the divergence in the two benchmarks.

As well, WTI was weighed down by the bearish crude oil inventory report released by the EIA (U.S. Energy Information Administration) on July 8. Read Part 1 for a detailed discussion on WTI and Brent crude oil price movements in the week ended July 13.

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WTI–Brent spread movements

The WTI–Brent spread has converged significantly since February, when the differential had widened to ~$12 per barrel. As of July 13, it was nearer ~$5.65 per barrel. In January, the two benchmarks were trading near parity. This demonstrates how volatile global oil markets have been over the last few months.

Who gains, who loses

A wider WTI–Brent spread is negative for US oil producers such as Oasis Petroleum (OAS), Hess (HES), Cimarex Energy (XEC), and Anadarko Petroleum (APC). A wider spread means that US crude oil producers are getting less money for their domestic output than their international counterparts.

Combined, these oil-producing companies make up ~4.2% of the iShares US Energy ETF (IYE).

A wider spread also discourages American producers from pumping more crude oil, which is negative for MLP or master limited partnership companies such as Plains All American Pipeline Partners (PAA), which transports crude oil.

On the other hand, US refiners, such as Phillips 66 (PSX), benefit from a wider WTI–Brent spread. These companies get access to cheaper crude than refiners do elsewhere. Plus, these companies get international prices—benchmarked to Brent crude—for their refined products.

WTI and Brent forecasts

According to the EIA’s “Short-Term Energy Outlook,” released on July 7, Brent prices averaged $61 per barrel in June, $3 per barrel less than in May. In contrast, WTI crude oil prices averaged $60 per barrel in June, $1 per barrel more than the May average. WTI got a boost from falling Cushing inventories in May as well as from robust refinery runs.

The EIA projects that Brent crude oil prices will average $60 per barrel in 2015 and $67 per barrel in 2016. WTI prices are projected to average $5 per barrel less than Brent in both years.


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