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Will US Oil Exports End 2018 on a Low Note?

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Brent-WTI spread

On December 17, Brent crude oil February futures settled at ~$9.41—higher than WTI crude oil February futures. On December 10, the spread was ~$8.77.

On December 10–17, Brent crude oil February futures fell 0.6%—1.4 percentage points lower than the fall in WTI or US crude oil February futures.

In the past five trading sessions, the United States Brent Oil ETF (BNO) has fallen 1.8%—1 percentage point less than the fall in the United States Oil ETF (USO). BNO tracks Brent crude oil futures, while USO follows US crude oil futures.

A higher level of US crude oil production and the OPEC and non–OPEC deal might be behind US crude oil’s underperformance 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 7.

In the same week, US crude oil exports fell by ~0.93 MMbpd to ~2.27 MMbpd. US crude oil exports rose by ~0.9 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 towards the end of December.

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 effect. On October 19, the Brent-WTI spread expanded to $10.66—the widest level since June 8. On October 19–December 17, the Brent-WTI spread contracted by ~$1.3, while the VanEck Vectors Oil Refiners ETF (CRAK) fell 13.6%.

Phillips 66 (PSX) and Valero Energy (VLO), which account for ~16.5% of CRAK, have fallen 16.5% and 21.8%, 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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