Why Investors Should Watch the Brent-WTI Spread

The Brent-WTI spread

On May 17, 2017, WTI (West Texas Intermediate) crude oil (UCO) (USO) (OIIL) (USL) active futures were trading at a discount of $3.14 per barrel to Brent crude oil (BNO) active futures. On May 10, 2017, the spread was at $2.89 per barrel.

Why Investors Should Watch the Brent-WTI Spread

Since OPEC’s (Organization of the Petroleum Exporting Countries) deal in November 2016, the Brent-WTI spread has risen. The spread has expanded on expectations of a reduction in global crude oil supply outside the United States due to OPEC’s cuts together with rising US supply.

The expansion in the spread over the trailing week could be due to optimism about OPEC’s extension of production cuts into 2018 along with expectations that US crude oil production will climb due to higher prices.

Brent-WTI spread is an important indicator for energy investors

The spread between Brent (BNO) and WTI crude oil (UWTI) prices impacts US upstream producers (XOP), midstream transporters (AMLP), and downstream refiners (CRAK).

When US WTI crude oil is cheaper than Brent crude oil, it means that US upstream producers get less money than their international counterparts for each barrel of oil they produce. However, the situation is more profitable for downstream US refiners because crude oil is an input for them. However, US refiners’ products are benchmarked to international Brent prices.

When WTI’s discount to Brent is deep enough, it could cover shipping and transportation costs. Such a situation would be an opportunity for upstream or midstream companies to seek higher prices outside North America via exports. In 2017, US crude oil exports have been an average of ~90.2% higher than they were during the same period in 2016.

For a better understanding of US upstream companies, check out Market Realist’s primer on the upstream industry.