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Will the WTI-Brent Spread Continue to Diverge?

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WTI-Brent spread price overview

WTI (West Texas Intermediate) crude oil’s discount to Brent crude widened this week. The WTI-Brent spread was $3.61 per barrel on October 27, 2015, widening from the week prior when it closed at $3.39 per barrel on October 23, 2015.

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Historic view of WTI-Brent spread movements

In January, the two crude oil benchmarks were exchanging closely. However, in February, the WTI-Brent spread widened to ~$12 per barrel. After that, the differential converged significantly and is now fluctuating between ~$2 to ~$5 per barrel.

Why did the WTI-Brent spread widen?

The main reason for the fall in WTI versus Brent crude oil prices this week was due to disappointing quarterly earnings reports from companies operating in the US energy sector. Low crude prices decreased US oil producers’ revenues, raising concerns about return on investments from the energy sector. Cutting production from 9.6 Mbpd (thousand barrels per day) to 9.1 Mbpd has not helped to convert demand into prices. This had more of an effect on WTI prices than Brent prices, widening the spread.

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Who gains and who loses from the WTI-Brent spread?

A wider spread is negative for oil producers such as ConocoPhillips (COP), Apache Corporation (APA), Diamondback Energy (FANG), Hess Corporation (HES), Murphy Oil Corporation (MUR), and Cimarex Energy (XEC). These producers will get lower prices for their products, which may lead to a fall in production volumes. A fall in production volumes negatively affects logistics operators such as Plains All American Pipeline (PAA).

On the other hand, refiners gain from a wider spread. Refiners that may gain include Valero Energy Corporation (VLO), Marathon Petroleum Corporation (MPC), Tesoro Corporation (TSO), and Phillips 66 Company (PSX). ConocoPhillips (COP) accounts for 4.6% of the iShares Dow Jones US Energy Sector ETF (IYE). Phillips 66 (PSX) accounts for 3.2% of Vanguard Energy ETF (VDE).

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