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WTI–Brent Spread Continues to Diverge: Who Gains and Who loses?

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WTI–Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil widened in the week ended August 14 over the previous week. The differential as of August 14, Friday, was $6.53 per barrel. On August 7, it was $4.74 per barrel.

Both crude oil benchmarks were hit by the Chinese currency devaluation earlier in the week, but WTI was also weighed down by macroeconomic factors such as the strengthening dollar. Plus, the refinery outage at the 290,000-barrels-per-day distillation unit at BP PLC’s (BP) Whiting refinery raised concerns about reduced crude oil demand. This explains the divergence in the two benchmarks. Read Part 1 of this series for a detailed summary of price movements.

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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. It had narrowed down to $3 per barrel in June, but it has again widened back to near ~$6.53 per barrel recently. In January, the two benchmarks were trading near parity.

Who gains? Who loses?

A wider WTI–Brent spread is negative for US oil producers such as Occidental Petroleum (OXY) 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 get for their output benchmarked to Brent.

Combined, these oil-producing companies make up 6.84% of the Energy Select Sector SPDR ETF (XLE).

A wider spread also discourages American producers from pumping more crude oil, which is negative for MLP companies such as Plains All American Pipeline Partners (PAA), which transport 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 oil 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 August 11, Brent prices averaged $57 per barrel in July, $4 per barrel less than in June. In contrast, WTI crude oil prices averaged $51 per barrel in July, $9 per barrel less than the June average.

The EIA projects that Brent crude oil prices will average $54 per barrel in 2015 and $59 per barrel in 2016. WTI prices are projected to average $5 per barrel less than Brent in both years.

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