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Brent-WTI Spread Might Push Oil Exports and Downstream Stocks Up

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Brent-WTI spread

On September 10, 2018, Brent crude oil November futures settled ~$9.83 higher than WTI crude oil October futures, the highest level for the Brent-WTI spread since June 19, 2018. On August 31, 2018, the spread was ~$7.84.

Between August 31 and September 10, 2018, Brent crude oil November futures fell just 0.3%. WTI, or US crude oil October futures, fell 3.2% during that period. In the past five trading sessions, the United States Brent Oil ETF (BNO) fell 0.3%, and the United States Oil ETF (USO) fell 3.4%. BNO tracks Brent crude oil futures, while USO follows US crude oil futures.

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US crude oil exports

The above chart shows the broadly positive relationship between US crude oil exports and the Brent-WTI spread since December 2015. Exports seem to follow the Brent-WTI spread with a lag. The US lifted the ban on US crude oil exports in December 2015. Since then, US crude oil production has increased ~19.8% to ~11 MMbpd (million barrels per day) in the week ended August 31, 2018.

In the week ended August 31, 2018, US crude oil exports rose ~1.3% MMbpd year-over-year. However, in the same week, US crude oil exports fell ~0.3 MMbpd to ~1.5 MMbpd. If the Brent-WTI spread expands more because of looming US sanctions on Iran oil exports discussed in part one, it could be a positive development for US crude oil exports in the coming weeks.

Brent-WTI spread and US energy companies

A widening Brent-WTI spread is good for US refiners and US oil exporters, but it’s a disadvantage for US oil producers selling in the US market. A narrowing spread has the opposite impact. On July 20, 2018, the Brent-WTI spread fell to $2.61, the lowest level since July 31, 2017. Between July 20 and September 10, 2018, the Brent-WTI spread expanded ~$7.22, while the VanEck Vectors Oil Refiners ETF (CRAK) rose 4.3%.

Phillips 66 (PSX) and Valero Energy (VLO) account for ~16.5% of CRAK. These stocks have risen 3.3% and 8.5%, respectively, since July 20, 2018. Another expansion in the Brent-WTI spread could be favorable for US refining stocks in the days ahead.

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