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WTI and Brent Oil Spread Makes US Crude Oil Exports Unviable

Gordon Kristopher - Author

Dec. 16 2015, Updated 7:50 a.m. ET

WTI and Brent crude oil

As we saw in the previous part of this series, the crude oil market reacted to a possible lifting of the US crude oil export ban in yesterday’s trade. US crude oil prices rose almost 3%, and Brent oil rose 1.4%. The Brent and WTI (West Texas Intermediate) crude oil price spread is vital for US producers like ConocoPhillips (COP), Noble Energy (NBL), Hess Corporation (HES), and Pioneer Natural Resources (PXD) to benefit from the lifting of the US crude oil export ban.

The Brent and WTI crude oil price spread peaked at $14 per barrel in February 2015 and bottomed out at $1.10 per barrel in yesterday’s trade. The wider spread benefits US refiners like Phillips 66 (PSX), as they pay less for crude oil.

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Geographical challenges 

Brent crude oil is traded more than WTI crude oil in the world. Brent crude oil futures contracts account for 65% of the globally traded crude oil futures contracts. US crude oil is landlocked and is transported mainly by pipelines. However, Brent crude oil is transported via pipelines, oil tankers, and trucks.

Even if the United States lifts its crude oil export ban, the cost of transporting crude oil from the United States will be more expensive than the cost of transporting Brent crude oil. Thus, major importers like China will find it cheaper to import Brent crude oil. Why? The spread between Brent and WTI crude oil prices is a meager $1.10 per barrel. Industry experts suggest that the Brent and WTI crude oil price spread should be at least $4 per barrel for US oil producers’ exports to be profitable.

Thus, exporting US crude oil doesn’t make sense with the current spread, even if the US lifts its export ban. However, US producers could benefit when the spread between Brent and WTI crude oil prices widens over the long term. Read the next part of this series to see whether these benchmark prices are likely to converge or diverge.

The volatility in the market also affects ETFs like the United States Oil Fund LP (USO) and the iShares US Oil Equipment & Services ETF (IEZ).


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