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Why Did the WTI-Brent Spread Converge?

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WTI-Brent spread

Brent crude oil’s premium over WTI (West Texas Intermediate) crude oil converged in the week ending November 6, 2015—compared to the previous week. As of November 16, the differential was $2.80 per barrel. On November 9, it was $3.32 per barrel.

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Crude oil benchmarks 

Both the WTI and Brent crude oil benchmarks fell last week after the API (American Petroleum Institute), EIA (U.S. Energy Information Administration), and IEA (International Energy Agency) released the inventory reports. All of the reports showed larger-than-expected inventory growth. The IEA’s report showed that the crude oil demand grew less than the supply. This had a greater impact on crude oil prices around the globe. It impacted weak global demand more than the US demand. This weighed on the crude oil prices—especially on Brent crude oil prices. So, the WTI-Brent spread narrowed last week.

Who gains and who loses?

A narrowed WTI-Brent spread has a positive impact on US producers. It allows US oil producers to receive the same money domestically compared to their international counterparts benchmarked to Brent crude prices. Oil producers like Hess (HES), Occidental Petroleum (OXY), Cimarex Energy (XEC), and Oasis Petroleum (OAS) certainly make the same gains as oil producers around the globe.

A narrowed WTI-Brent spread boosts production volumes. This leads to increased transport volumes. So, transport operations like Plains All American Pipeline Partners (PAA) will benefit. A narrowed WTI-Brent spread also has a positive impact on ETFs like the United States Oil ETF (USO), the iShares U.S. Energy ETF (IYE), and the iShares Global energy ETF (IXC).

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