Energy Space: Analyzing the Fall in the Brent-WTI Spread

Brent-WTI spread and downstream stocks

Any expansion in the Brent-WTI spread could benefit US refineries and cause their input costs to fall. US refiners’ output prices are benchmarked to stronger Brent prices. A narrowing spread has the opposite impact.

Energy Space: Analyzing the Fall in the Brent-WTI Spread

On June 24, the Brent-WTI spread contracted to ~$6.96—the lowest level since April 9. US downstream stocks account for 27.7% of the VanEck Vectors Oil Refiners ETF (CRAK). The lower Brent-WTI spread might drag CRAK. Next week, the OPEC plus meeting will likely be important for US downstream stocks.

Brent-WTI spread and US upstream companies

The narrowing gap between Brent and WTI crude oil prices could increase the transportation cost burden on US crude oil exporters. In fact, the higher spread could help mitigate transportation costs and increase profits.

A rise in the Brent-WTI spread could mean lower domestic prices for US crude oil producers like Chesapeake Energy (CHK) and Concho Resources (CXO) compared to ConocoPhillips (COP). ConocoPhillips’s net income sensitivity with every $1 change in Brent/Alaskan North Slope crude oil prices per barrel is $150 million. The company’s same relationship with WTI crude oil is ~$30 million–$40 million. Pioneer Natural Resources (PXD) will likely be impacted by the lower Brent-WTI spread. The company’s oil output follows Brent crude oil prices.

Brent-WTI spread in 2019

On June 11, the EIA (U.S. Energy Information Administration) reported its Short-Term Energy Outlook report. Based on the report, the EIA expects US oil production to grow by 1.4 MMbpd (million barrels per day) and 0.9 MMbpd on a year-over-year basis in 2019 and 2020, respectively. The rise in US oil production could expand the Brent-WTI spread.