Why Did the Brent-WTI Spread Narrow?



Brent-WTI spread

The Brent-WTI spread stood at $1.4 as of February 22. Since June 2014, the spread has fallen by 89.2% as of February 23. As of June 19, 2014, the spread was at $13.06. The Brent-WTI spread reached a high of $15.63 in January 2014. This indicates that supplies increased compared to the demand.

The surplus oil forces buyers to be choosy in the two categories. This causes the spread to increase. When the gap starts to narrow it’s an indication that oil might have bottomed because supply might decrease. WTI (West Texas Intermediate) crude and Brent represent a different category of crude. Brent represents comparatively sweeter crude with less sulfur content compared to WTI crude oil. Brent is the crude benchmark followed in Europe and Russia. WTI crude oil represents the crude benchmark in the US.

However, in December when the ban on US crude was lifted, the spread fell because US crude reached the international market. As WTI crude reaches the international market, Brent crude will be blended with the former. This will erase the difference between the two categories of crude oil.

US-based (QQQ)(SPXL) oil and gas companies such as ExxonMobil (XOM) and Chevron (CVX) use the WTI crude benchmark. European oil and gas companies such as BP (BP) and others use the Brent benchmark. In the next part, we’ll discuss the continuing situation in the Middle East.

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