US Oil Exports and Downstream Stocks Might Retreat



Brent-WTI spread

On January 2, Brent crude oil March futures settled at ~$8.37—higher than WTI crude oil February futures. On December 26, the spread was ~$8.54.

On December 26–January 2, Brent crude oil March futures rose 0.3%—40 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 fallen 0.7%—20 basis points more than the fall in the United States Oil ETF (USO). BNO tracks Brent crude oil futures, while USO follows US crude oil futures.

Expectations of increased supply outside the US might be behind WTI 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 ~27.5% to ~11.7 MMbpd (million barrels per day) in the week ending on December 21.

In the same week, US crude oil exports rose by ~0.6 MMbpd to ~2.969 MMbpd. US crude oil exports rose by ~1.76 MMbpd year-over-year. If the Brent-WTI spread contracts due to expectations of rising supply outside the US, US crude oil exports might retreat.

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 2, the Brent-WTI spread contracted by ~$2.3, while the VanEck Vectors Oil Refiners ETF (CRAK) fell 17%.

Phillips 66 (PSX) and Valero Energy (VLO), which account for ~16.5% of CRAK, have fallen 14.3% and 18.5%, 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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