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WTI-Brent Spread Diverged: What Are the Implications?

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Nov. 9 2015, Published 9:04 a.m. ET

WTI-Brent spread

WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil widened in the week ended November 6, 2015, compared to the previous week. The differential as of November 6 was $3.13 per barrel. On October 30, it was $2.97 per barrel.

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More on benchmarks

Both crude oil benchmarks started out weak due to higher Russian output and weak Chinese manufacturing data. However, Brent fell more on these concerns, which explains the convergence of the benchmarks early during the week as the graph above shows. Also, WTI saw higher gains compared to Brent early in the week due to a rally in gasoline and diesel prices. However, as the week progressed, WTI saw higher losses compared to Brent due to the bearish EIA inventory data as well as a stronger dollar at the end of the week. This explains the widening of the benchmarks at the end of the week.

You can read more about the latest inventory report in EIA Reports Bearish Inventory: WTI Crude Oil Prices Fall. Read part one 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 2015 when the differential widened to ~$12 per barrel. As we’ve already seen, it has recently narrowed to levels near ~$3 per barrel. In January, the two benchmarks were trading near parity.

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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 are receiving 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. The EIA will release its next STEO on November 10, 2015.

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