Oil Exports and Downstream Stocks Might Start 2019 on a High Note



Brent-WTI spread

On January 7, Brent crude oil March futures settled at ~$8.81—higher than WTI crude oil February futures. On December 31, the spread was ~$8.39.

On December 31–January 7, Brent crude oil March futures rose 6.6%—20 basis points less than the rise in WTI or US crude oil February futures. In the trailing week, the United States Brent Oil ETF (BNO) has risen 6.1%—40 basis points less than the rise in the United States Oil ETF (USO). BNO tracks Brent crude oil futures, while USO follows US crude oil futures.

Easing concerns of increased supply outside the US might be behind WTI 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 ~27.5% to ~11.7 MMbpd (million barrels per day) in the week ending on December 28.

In the same week, US crude oil exports fell by ~0.7 MMbpd to ~2.23 MMbpd. US crude oil exports rose by ~0.7 MMbpd year-over-year. If the Brent-WTI spread expands due to easing concerns about rising supply outside the US, crude oil exports might gain.

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–January 7, the Brent-WTI spread contracted by ~$1.8, while the VanEck Vectors Oil Refiners ETF (CRAK) fell 13.5%.

Phillips 66 (PSX) and Valero Energy (VLO), which account for ~16.5% of CRAK, have fallen 11% and 16.9%, 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 higher, it could support the fall in these US refining stocks.


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