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WTI-Brent Spread Converged: Who Loses and Who Gains?

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WTI-Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil narrowed in the week ended October 2, 2015, compared to the previous week. The differential as of October 2 was $2.59 per barrel. On September 25, it was $2.90 per barrel.

Both crude oil benchmarks started out weak due to weak Chinese economic data. However, Brent rose mid-week after Russian airstrikes on Syria were seen as a potential threat to supplies. Meanwhile, WTI was bogged down by a mixed inventory report released by the EIA (U.S. Energy Information Administration). This explains why the benchmarks actually diverged mid-week as we can see in the graph above.

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The WTI-Brent spread widened to $3.28 per barrel on September 30, 2015. However, a positive US oil rig count, discussed in the first part of this series, gave WTI a necessary boost, and WTI saw higher gains compared to Brent. This resulted in the two benchmarks converging as the week came to an end.

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

WTI-Brent spread movements

The WTI-Brent spread has converged significantly since February of this year, when the differential widened to ~$12 per barrel. As we’ve already seen, it has recently narrowed to levels near ~$2.59 per barrel. In January, the two benchmarks were trading near parity.

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Who gains and who loses?

A narrower WTI-Brent spread is positive for US oil producers such as 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. A narrower spread reduces the difference.

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 such as 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. So, a narrower spread is bad for them.

WTI and Brent price forecasts

According to the EIA’s STEO (Short-Term Energy Outlook) report released on September 9, 2015, 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 released its October STEO report earlier today.

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