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Analyzing the Brent-WTI, WTI-WCS, and Midland Spreads

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Oil spreads

We’ll discuss the Brent-WTI, WTI Cushing-WTI Midland, and WTI Cushing-WCS (Western Canadian Select) oil spread trends in the first quarter.

Brent-WTI spread

The Brent-WTI spread is vital for US refiners. Usually, refined product prices globally trend in line with Brent crude oil. When refiners use crude oil like WTI, which trades at a discount to Brent, it supports their margins and earnings. The Brent-WTI spread has widened by $4.7 per barrel YoY (year-over-year) to $9.0 per barrel in the first quarter—a favorable scenario for refiners.

Midland-Cushing and WTI-WCS spreads

Some crude oils are available at an additional discount to WTI-Cushing. Refiners that process these discounted oils can benefit even more from the oil spreads.

An oil spread like WTI Cushing-WTI Midland is important for refiners like HollyFrontier (HFC) and Delek US Holdings (DK). These companies can process WTI Midland crude in their refineries. HollyFrontier processed 171,000 barrels per day of Permian crude in its refineries in the fourth quarter. Delek US Holdings can refine ~70% of the Permian oil in its system. WTI Midland can be purchased at a discount to WTI Cushing. So, a wider oil spread is better for these companies.

A wider WTI-WCS spread is better for refiners that can use Canadian oil like Marathon Petroleum (MPC). With Andeavor’s refining and midstream assets, Marathon Petroleum is set to take advantage of the better WCS differential. HollyFrontier can also process Canadian crude oil in its refineries.

The Cushing-Midland oil spread has been at an average of $1.4 per barrel in the first quarter—compared to $0.3 per barrel in the first quarter of 2018. The rise in the oil spread could expand the refining margin and earnings YoY in the first quarter for refiners like HollyFrontier, Marathon Petroleum, and Delek US Holdings. However, the WTI-WCS spread has narrowed by $15.7 per barrel YoY to $10.4 per barrel in the first quarter.

Two of the three main oil spreads have widened in the first quarter. Although refining cracks have fallen in the first quarter, higher oil spreads could support refiners. Refiners are positioned to take advantage of these favorable spreads.

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