WTI and Brent Crude Spread Could Narrow More in the Long Term



WTI and Brent oil 

On Wednesday, September 23, 2015, November WTI (West Texas Intermediate) crude oil futures contracts fell by $1.88 and closed at $44.48 per barrel. Similarly, Brent crude oil futures for November delivery fell by $1.33 and settled at $47.75 at the close of trade on Wednesday. WTI and Brent crude oil futures’ differential was at $3.27 per barrel on September 23, 2015. However, it hit $2.04 per barrel on September 15, 2015—the narrowest spread since February 2015.

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The mammoth production from the Middle East and Russia will continue to put pressure on crude oil prices. In contrast, slowing US crude oil production and falling crude oil inventories led to the recent surge in crude oil prices. However, over the long term, the crude oil market will be oversupplied and it will put pressure on crude oil prices.

The long-term lower crude oil prices could slow down the high-cost US shale producers in the long term. It could positively impact US WTI crude oil prices. However, the speculation of rising production in Iran and Iraq will flood the oil glut market and Brent prices could fall more. This could further narrow the spread of WTI and Brent crude oil in the long term.

The wider spreads between WTI and Brent benefits US crude oil refining companies like Tesoro (TSO), Marathon Petroleum (MPC), and Valero Energy (VLO). They account for 7.12% of ETFs like the Select Sector SPDR Fund ETF (XLE). In contrast, a lower crude spread benefits US crude oil producers. The volatility in the crude oil market impacts energy ETFs like XLE and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Crude oil benchmarks 

WTI is the US benchmark for crude oil. WTI crude oil is priced at Cushing, Oklahoma—the futures contract delivery point for NYMEX crude oil. WTI is the receiving price for oil producers in the US. In contrast, Brent is the global benchmark for crude oil. It represents international crude oil producers’ receiving price.


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