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How Do Inventory Builds Impact the WTI-Brent Spread?

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WTI-Brent spread

The Brent crude oil premium to WTI (West Texas Intermediate) crude oil spread widened in the week ending November 20, 2015—compared to the WTI-Brent spread on November 16. As of Friday, November 20, the differential was $4.27 per barrel. On November 13, it was $2.87 per barrel.

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WTI-Brent spread widened

In the above graph, you can see that WTI and Brent prices moved in the same direction from November 13 to November 17. However, both of the benchmark prices moved in different directions starting on November 18. Brent prices gained and WTI prices fell. This is mainly because of the supply glut. The US crude oil inventories rose for eight weeks in a row. However, the inventory rise was less than expected. The crude oil demand growth and the strong dollar weighed on the crude oil prices (USO).

Brent prices were almost stable last week. The prices were $43–$44 per barrel. On Friday, November 20, WTI prices fell because of rollover in the expiring WTI futures contracts for December. Brent prices rose due to the pre-weekend short covering. This led to a divergence in the WTI-Brent spread.

What’s the impact?

A wider spread has a negative impact on US oil producers. Due to the wider spread, US oil producers receive less money for their crude oil (USO) than their international competitors. This is a result of international companies benchmarking with Brent prices. This is due to oil producers’ wider revenue spread—like Occidental Petroleum (OXY), ConocoPhillips (COP), Hess (HES), Anadarko Petroleum (APC), Oasis Petroleum (OAS), and EP Energy (EPE).

Oasis Petroleum accounts for 1.9% of the SPDR S&P Oil & Gas Exploration &Production ETF (XOP). Anadarko Petroleum accounts for 5.50% of the iShares U.S. Oil & Gas Exploration and Production ETF (IEO).

A wider spread could discourage production volumes. This results in lower transport volumes. This could have a negative impact on MLPs like Plains All American Pipeline (PAA).

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