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US Crude Oil Exports Could Rise More

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Brent-WTI spread expanded

On April 30, Brent crude oil July futures settled at $6.12 more than WTI crude oil June futures. The difference is called the “Brent-WTI spread.” On April 23, the Brent-WTI spread was at $5.37.

On April 23–30, Brent crude oil July futures rose 0.9%—compared to a 0.1% fall in WTI crude oil June futures.

In the past five trading sessions, the United States Brent Oil ETF (BNO) rose 0.3%, while the United States Oil ETF’s (USO) fell 0.9%. BNO tracks Brent crude oil futures, while USO follows US crude oil futures.

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Brent-WTI spread and US crude oil production

The US lifted a ban on US crude oil exports in December 2015. Since then, US crude oil production has increased ~15.3% to ~10.59 MMbpd (million barrels per day) in the week ending April 20—based on the EIA’s weekly data released on April 25.

Booming US production and major oil producing nations’ actions to cut international supplies helped the Brent-WTI spread stay in the positive zone (Brent priced higher than WTI) and encouraged US crude oil exporters to increase their exports. According to CME Group, the Brent-WTI spread in excess of $4–$5 could compensate US oil exporters for their transportation costs.

US oil exports can rise further

In the week ending April 20, US crude oil exports rose by ~0.58 MMbpd to ~2.33 MMbpd—a record level based on the EIA’s weekly data. On a year-over-year basis, US crude oil exports have increased by ~1.2 MMbpd.

The above graph shows a broadly positive relationship between US crude oil exports and the Brent-WTI spread since December 2015.

So, if the Brent-WTI spread remains above $5, we could see more upside in US crude oil exports.

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Brent-WTI spread and US energy companies

US oil producers’ revenue realization would be less per barrel of oil sold in the domestic market compared to the international market when Brent crude oil is priced above WTI crude oil. So, a higher Brent-WTI spread would encourage US oil producers to export more of their production.

The same price difference gives US refineries an opportunity to earn higher profits. Refineries’ output products follow higher Brent crude oil prices, although they can choose to consume cheaper US crude oil to process into products.

The VanEck Vectors Oil Refiners ETF (CRAK) holds refining stocks. On March 1, the Brent-WTI spread fell to $2.84—the lowest level since August 4, 2017. On March 1–April 30, CRAK rose 10.5%. The Brent-WTI spread expanded by $3.28 during this period. Phillips 66 (PSX) and Valero Energy (VLO) have risen 22.5% and 22.1% since March 1. These two stocks account for ~16.5% of CRAK.

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