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WTI Crude Oil Traded at a Discount over Brent Crude Oil

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WTI–Brent spread

The WTI (West Texas Intermediate) crude oil premium over Brent crude oil converged from $0.48 per barrel for the week ended January 15, 2016, to $0.1 per barrel for the week ended January 22. This week, the WTI premium over Brent crude oil turned to a discount. The WTI crude oil discount over Brent crude oil stood at $0.32 per barrel on January 26.

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WTI–Brent spread widened

The increased crude oil production levels from OPEC[1. Organization of the Petroleum Exporting Countries] and some non-OPEC crude oil producers–to defend market share–resulted in global crude oil oversupplies. As a result, crude oil prices fell more than 60% and the WTI–Brent spread also narrowed marginally. After the US crude oil export ban was lifted, WTI traded at a premium to Brent. But, due to the continued rise in crude oil inventories and lower distillate demand, WTI crude oil again traded at a discount to Brent crude oil.

The WTI–Brent Spread: A short history

The low price environment of crude oil commenced from the fourth quarter of 2014 and is still going. If anything, it’s expected to continue for even longer. The US shale oil boom, along with OPEC and non-OPEC crude oil production, pressured crude oil prices with oversupplies. The WTI–Brent spread was relatively narrow between the 1993–2006, but the shale oil boom in the United States widened the WTI–Brent spread to $20 per barrel. Due to extreme oversupplies in US crude oil markets, the spread widened to $29.7 per barrel on September 22, 2011.

Impact

The wider WTI–Brent spread means lower prices for WTI crude oil compared to Brent crude oil. This yields lower revenues for US crude oil producers such as Continental Resources (CLR), Devon Energy (DVN), Anadarko Petroleum (APC), Occidental Petroleum (OXY), Apache (APA), and Marathon Oil (MRO) compared to international crude oil producers.

Apache (APA) accounts for 1.3% of the iShares US Energy ETF (IYE).

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