WTI-Brent Spread Converges: Will the Trend Continue?



Price overview

Brent crude oil’s premium over WTI (West Texas Intermediate) converged from $3.56 per barrel to $2.97 per barrel on October 20, 2015. It was $4.74 per barrel on October 29, close to $5 per barrel, but Baker Hughes’ US oil rig count data and August’s low oil output brought down the WTI-Brent spread to settle at $2.97 per barrel for the week ended October 30, 2015.

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Why did the WTI-Brent spread converge?

The WTI-Brent spread converged due to a rise in WTI’s price compared with Brent’s price. WTI’s price rose more than Brent’s because of the fall in the US oil rig count, low oil output levels in August, and steady US crude oil imports—9.1 Mbpd (thousand barrels per day) on October 23, 2015. The rise in crude oil stocks by 3.4 Mbpd for the week ended October 23, 2015, also influenced WTI prices on Thursday’s trade, but rig count data and August’s output levels led to the rally in WTI crude oil prices for the week ended October 30, 2015.

Impact of the WTI-Brent spread

A higher rise in WTI prices than in Brent prices reduces the WTI-Brent spread. This has a positive impact on US oil producers, as it allows them to boost their production levels and concentrate on exports. This increases revenues for US oil producers and transport operators such as Occidental Petroleum (OXY), Oasis Petroleum (OAS), Hess Corporation (HES), Cimarex Energy (XEC), Anadarko Petroleum (APC), and Plains All American Pipeline (PAA).

Rising WTI crude prices and a lower differential between WTI and Brent also has a positive impact on ETFs such as the iShares US Oil & Gas Exploration & Production ETF (IEO), the United States Oil ETF (USO), and the United States 12 Month Oil ETF (USL).


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