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What's Driving The Shrinking Brent:WTI Oil Price Spread?

By Ellen R. Wald, Ph.D.CommoditiesJan 31, 2018 05:30AM ET
www.investing.com/analysis/whats-driving-the-shrinking-brentwti-oil-spread-200285210
What's Driving The Shrinking Brent:WTI Oil Price Spread?
By Ellen R. Wald, Ph.D.   |  Jan 31, 2018 05:30AM ET
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The price differential between WTI (the U.S. benchmark) and Brent (the international benchmark) is shrinking. Last month Brent was $7 per barrel more than WTI, but this differential (often called a “spread”) has now dropped to only about $4 per barrel. If current market conditions continue, we could see the two converge even more.

Crude Oil Weekly
Crude Oil Weekly

WTI is considered a light, sweet type of crude oil. Brent is also considered a sweet crude, though it contains more sulfur than WTI.

Brent Oil Weekly
Brent Oil Weekly

Another major difference between WTI and Brent: for many years, due to the 1975 U.S. crude oil export ban, U.S. oil could not be sold outside of the United States. This changed in January 2016, when Congress lifted the ban and permitted U.S. producers to export crude oil produced in the United Sates.

For many years, WTI and Brent were traded at nearly the same price. In fact, for many years, the price differential was barely $1. However, in 2011, the prices of WTI and Brent started to diverge significantly. Since that time, WTI prices have been noticeably—and at times significantly—lower than Brent. This was directly connected to an increase in the production of light, sweet crude in the U.S. and the prohibition on its export.

In 2014, Brent and WTI prices briefly approached convergence, though WTI still remained a few dollars below Brent. It was expected that the price differential between WTI and Brent would decrease when the crude oil export ban in the United States was lifted. However, a variety of factors kept WTI prices lower than Brent prices in 2017.

  1. Poor infrastructure in the United States has made it difficult to bring WTI to the global market and forced producers to price it lower than the international benchmark.
  2. Hurricanes disrupted oil exports and refineries on the Gulf coast. This caused crude oil inventories to build up and drove the price of WTI down for several months, whereas Brent remained steady.
  3. Disruption of the Forties pipeline in the North Sea shut down production of oil in that area for a time. This caused Brent prices to rise more than WTI.

By early January 2018, the disruptions from the hurricanes and the Forties pipeline were resolved, and the WTI and Brent spread now reflects this. The price differential has dropped by 40%.

U.S. crude oil stocks have been falling, new pipelines have opened and oil exports have increased. All of these factors have helped reduce the spread, though it still remains larger than pre-2011 levels. If these trends continue, it is possible that the price differential between Brent and WTI could shrink further and even become irrelevant—at least for a while.

What's Driving The Shrinking Brent:WTI Oil Price Spread?
 

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What's Driving The Shrinking Brent:WTI Oil Price Spread?

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Jack Smith
BullyGoat Jan 31, 2018 10:08AM ET
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Brent is a higher quality than WTI
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Milan Milosevic
Milan Milosevic Jan 31, 2018 9:28AM ET
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?. And on the end of the report, it is not clearly, for me, what's...... :) Typically maybe yes maybe no!
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mm mm
TimeQuant Jan 31, 2018 9:24AM ET
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I like your analysis usually, but short term spread pricing in futures is more complex then simple supply and demand  fundamental logic. shorter term pricing logics to consider for example. 1: IR complex first test of bear steepening on long end is significant from bull flattener we are used to.  2: brent is rolling in 2 days on futures roll 3: armaco ipo talks put on hold effects this geopolitical sentiment as bianry logic for brents lead at moment. 4: heating oil lead the rise in the crack spread over the disruptions due to cold spell in usa this past month and this is leading the crack unwind as well.  Your analysis is light on the sentiment and technical sides for this short term monthly noise in the spread versus supply and demand long run dynamics over quarters. we had a lot of overlapping events this first month of year and your analysis is to simplistic this time i feel for this short term complexity.  cheers
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Val de Ese Exxon
Val de Ese Exxon Jan 31, 2018 9:24AM ET
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@timequant GJ. See my reply to your last comment here https://www.investing.com/commodities/crude-oil-commentary?comment=7841758
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Oliver Rios
orios01 Jan 31, 2018 8:21AM ET
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it's currency related
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