On July 2, Brent crude oil active futures settled ~$6.15 higher than the WTI crude oil active futures. On June 25, the spread was at $6.45. On July 1, the spread fell to $5.97—the lowest level in the past 11 months.
In the past five trading sessions, Brent crude oil September futures have fallen 2.9%—20 basis points more than the fall in WTI or US crude oil August futures. During this period, the United States Brent Oil ETF (BNO) has fallen 2.7%—20 basis points more than the fall in the United States Oil ETF (USO). BNO tracks Brent crude oil futures, while USO tracks US crude oil futures. The fall in oil inventories for the week ending June 21 might be behind the contraction in the spread.
Factors that could impact US oil exports
Usually, there has been a 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. From December 2015 to the week ending on June 21, US crude oil production rose ~31.8% to 12.1 MMbpd (million barrels per day)—near its record level.
For the week ending on June 21, US crude oil exports rose by 0.7 MMbpd. The US crude oil exports were at 3.77 MMbpd—a record level. US crude oil exports have risen by ~0.8 MMbpd year-over-year. However, with the contraction in the spread, US crude oil exports might fall in the coming weeks.
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. The higher spread could help mitigate transportation costs and increase profits.
Usually, any 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.