WTI-Brent Spread Narrows: Will the Trend Continue?



WTI-Brent spread

The WTI (West Texas Intermediate) crude oil discount over Brent crude oil has fallen in the last week. On December 11, the WTI-Brent spread was $2.31 per barrel. It narrowed to $1.1 per barrel in yesterday’s trade.

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The impact of supply on the WTI-Brent spread

US crude oil supplies have gradually decreased from 9.6 MMbpd (million barrels per day) in April 2015 to 9.3 MMbpd, and supplies are expected to fall below 9.0 MMbpd in 2016. In contrast, the global crude oil supply is adding 1.7 MMbpd more than demand. It seems that the US crude oil market is getting better in comparison with the global crude oil market. Thus, domestic crude oil prices like WTI should perform better.

The WTI-Brent spread has converged because Brent oil prices are suffering from oversupply. WTI oil prices have risen in the past two days on news that the US government will remove the export ban on crude oil. With the ban lifted, WTI crude oil will benefit from lower prices compared to Brent oil. Obviously, the consumption volume will increase, which will result in the rise of WTI crude oil prices (USO). For this reason, WTI crude oil prices have risen in comparison to Brent crude oil prices, which resulted in the narrower spread.

What’s the impact?

A narrower WTI-Brent spread is positive for US oil producers, as it allows them to sell their products at the same prices as international benchmark prices. This could push US crude oil producers to export. By exporting, crude oil producers like ConocoPhillips (COP), Hess Corporation (HES), Murphy Oil Corporation (MUR), Occidental Petroleum Corporation (OXY), Apache Corporation (APA), and Cimarex Energy (XEC) would see a rise in revenue.

Murphy Oil Corporation (MUR) accounts for 1.5% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).


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