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WTI-Brent Spread Diverged: What It Means for Key Stakeholders

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WTI-Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil widened in the week ended September 25, compared to the previous week. The differential as of Friday, September 25, 2015, was $2.9 per barrel. On September 18, it was $2.79 per barrel.

Both crude oil benchmarks started out strong due to positive US oil rig count numbers. However, WTI saw higher gains compared to Brent, the international benchmark, which caused the WTI-Brent spread to converge earlier in the week, as we can see in the graph above.

However, as the week progressed, and after seeing skittish movement in US stocks, WTI fell, causing the benchmarks to diverge. While both benchmarks did gain individually, WTI was unable to make up for its previous losses as the week progressed.

Read the first part of this series for a summary of last week’s crude oil price (USO) movements.

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WTI-Brent spread movements

The WTI-Brent spread has converged significantly since February, when the differential widened to ~$12 per barrel. As we’ve already seen, it has recently narrowed to levels near ~$2.9 per barrel. In January, the two benchmarks were trading near parity.

Who gains and who loses?

A wider WTI-Brent spread is negative for US oil producers like Occidental Petroleum (OXY) and Anadarko Petroleum (APC). A wider spread means that US crude oil producers are receiving less money for their domestic output than their international counterparts get for their output benchmarked to Brent.

Combined, these oil-producing companies account for 6.84% of the Energy Select Sector SPDR ETF (XLE). A wider spread could discourage US producers from pumping more crude oil. This is negative for MLP companies that transport crude oil, such as Plains All American Pipeline (PAA).

In contrast, US refiners like Phillips 66 (PSX) benefit from a wider WTI-Brent spread. These companies get access to cheaper crude oil than refiners do elsewhere. Also, these companies get international prices, benchmarked to Brent crude, for their refined products.

WTI and Brent price forecasts

According to the EIA’s (U.S. Energy Information Administration) STEO (Short-Term Energy Outlook) report released on September 9, Brent prices averaged $47 per barrel in August. This is $10 per barrel less than in July. WTI crude oil prices averaged $43 per barrel in August, which is $8 per barrel less than the July average.

The EIA projects that Brent crude oil prices should 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.

The EIA will release its next STEO on October 6.

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