WTI-Brent Spread Widened Last Week: Implications for Energy

WTI-Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil widened in the week ended October 23, 2015, compared to the previous week. The differential as of October 23 was $3.39 per barrel. On October 16, it was $3.20 per barrel.

WTI-Brent Spread Widened Last Week: Implications for Energy

More on benchmarks

Both crude oil benchmarks started out weak due to the possibility of the Iran nuclear deal being implemented by the end of this year and due to weak Chinese economic data released early last week. But Brent saw greater losses on these developments compared to WTI. This explains the convergence of the benchmarks around the beginning of the week.

A combination of bearish EIA (U.S. Energy Information Administration) inventory data, slowing rig reductions, and a stronger dollar weighed more on WTI at the end of the week. This explains why the two benchmarks diverged at the end of the week.

Read Part 1 of this series for a summary of last week’s crude oil price (USO) movements.

WTI-Brent spread movements

The WTI-Brent spread converged significantly since February when the differential widened to ~$12 per barrel. As we’ve already seen, it has recently narrowed to levels near ~$3.40 per barrel. In January, the two benchmarks were trading near parity.

Who gains and who loses?

A wider WTI-Brent spread is potentially negative 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.

Combined, the above two oil companies account for ~6.8% of the Energy Select Sector SPDR ETF (XLE). A wider spread could discourage US producers from pumping more crude oil. This could be negative for MLP companies such as Plains All American Pipeline (PAA) that transport crude oil.

In contrast, US refiners such as Phillips 66 (PSX) could 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 STEO (Short-Term Energy Outlook) report released on October 6, 2015, Brent prices averaged $48 per barrel in September. That’s $1 per barrel more than in August.

WTI crude oil prices averaged $46 per barrel in September, or $3 per barrel more than the August average. The rise was a result of falling US crude oil output and five straight weekly falls in inventories at Cushing.

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 $4 per barrel less than Brent in 2015 and $5 per barrel less than Brent in 2016.