Why the US Foreign Oil Supply Could Fall Further

Brent-WTI spread

On April 1, Brent crude oil June futures settled ~$7.4 higher than WTI crude oil May futures, the lowest level for the spread since January 30. On March 25, the spread was at ~$8.

In the past five trading sessions, Brent crude oil June futures have risen 3.3%, 1.4 percentage points fewer than the rise in WTI or US crude oil May futures. During this period, the United States Brent Oil ETF (BNO) rose 3.4%, 1.3 percentage points fewer than the rise in the United States Oil ETF (USO). BNO tracks Brent crude oil futures, while USO tracks US crude oil futures.

Why the US Foreign Oil Supply Could Fall Further

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US crude oil exports

The chart above shows the generally 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 United States lifted the ban on US crude oil exports in December 2015, US crude oil production started rising. From December 2015 to the week that ended on March 22, 2019, US crude oil production rose ~31.8% to 12.1 MMbpd (million barrels per day).

In the same week, US crude oil exports fell ~0.5 MMbpd to ~2.9 MMbpd, but US crude oil exports rose ~1.3 MMbpd year-over-year. The U.S. Energy Information Administration’s Monthly Crude Oil Production data report on March 29 showed a decline of 90,000 barrels per day in January from the previous month. This drop might have narrowed the Brent-WTI spread in the trailing week. Any further fall in the production figure could cause the Brent-WTI spread to contract and could limit the US oil supply to foreign countries.

Brent-WTI spread and US upstream companies

The contracting gap between Brent and WTI crude oil prices could be a cause for concern for US crude oil exporters. Any fall in the spread could increase transportation costs and decrease profits.

However, a fall in the Brent-WTI spread could reduce the gap between domestic prices for US crude oil producers such as Chesapeake Energy (CHK) and Concho Resources (CXO) compared to their peers, such as ConocoPhillips (COP), which has significant exposure outside the United States.