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Brent-WTI Spread Might Drag US Oil Exports and Downstream Stocks

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Nov. 20 2020, Updated 5:23 p.m. ET

Brent-WTI spread

On December 26, Brent crude oil February futures settled at ~$8.25—higher than WTI crude oil February futures. On December 19, the spread was ~$9.07.

On December 19–26, Brent crude oil February futures fell 4.8%—80 basis points more than the fall in WTI or US crude oil February futures.

In the past four trading sessions, the United States Brent Oil ETF (BNO) has fallen 2.2%—1 percentage point more than the fall in the United States Oil ETF (USO). BNO tracks Brent crude oil futures, while USO follows US crude oil futures.

Market expectations for the OPEC and non–OPEC deal having less of an impact on the global oil supply situation might be behind US crude oil’s outperformance compared to Brent crude oil.

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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. When the US lifted the ban on US crude oil exports in December 2015, US crude oil production started rising. US crude oil production rose ~26.3% to ~11.6 MMbpd (million barrels per day) in the week ending on December 14.

In the same week, US crude oil exports rose by ~0.05 MMbpd (million barrels per day) to ~2.32 MMbpd. US crude oil exports rose by ~0.46 MMbpd year-over-year. If the Brent-WTI spread contracts due to the possible slowdown in US crude oil production, US crude oil exports could fall.

Brent-WTI spread and US energy companies

While a widening Brent-WTI spread is good for US refiners and US oil exporters, it’s a disadvantage for US oil producers selling in the US market. A narrowing spread has the opposite impact. On October 19, the Brent-WTI spread expanded to $10.66—the widest level since June 8. On October 19–December 26, the Brent-WTI spread contracted by ~$2.4, while the VanEck Vectors Oil Refiners ETF (CRAK) fell 17.9%.

Phillips 66 (PSX) and Valero Energy (VLO), which account for ~16.5% of CRAK, have fallen 18.1% and 21%, respectively, since October 19. Apart from the Brent-WTI spread, the contraction in the WTI-WCS (Western Canadian Select) spread might have dragged US downstream stocks. If the Brent-WTI spread moves lower, it could drag these US refining stocks down.

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