After trading in line with WTI for some time, Bakken is back at a discount
Starting in late September and persisting through now, prices for crude priced at Clearbrook, Minnesota (which represents prices for much Bakken-based crude), began to trade at a significant discount to West Texas Intermediate (or WTI) crude, which is the US benchmark. Bakken crude has been trading at $10 or more below WTI for nearly a month. The spread has widened back out to around $10 per barrel, and this could be due to several factors, such as takeaway capacity lagging continually growing Bakken production, and seasonal refinery maintenance temporarily depressing crude demand.
In some instances, this could be construed as a negative data point for upstream energy names that produce significant amounts of oil in the Bakken (located in western North Dakota and eastern Montana), as it means they’re likely receiving lower prices for their crude production. These companies include Continental Resources (CLR), Oasis Petroeum (OAS), Whiting Petroleum, and Kodiak Oil & Gas (KOG), many of which are part of the SPDR Oil & Gas Exploration and Production ETF (XOP). For instance, WTI crude prices fell from ~$110 per barrel in early September to under $100 per barrel currently. Meanwhile, Bakken-based crude was trading at roughly $105 per barrel in early September and has since plunged to ~$85 per barrel. This lower selling price of oil cuts into producers’ revenues.
Spread has been prone to volatility due to surging Bakken production
Over the past several years, oil production in the Bakken Shale and surrounding areas has increased rapidly. For example, production in August 2013 reached 847,150 barrels per day compared to 638,150 barrels per day in August 2012 and 379,370 barrels per day in August 2011.
With the surge in oil production came a huge need for oil takeaway infrastructure. However, the completion of infrastructure had struggled to keep up with growth in production. This caused the price of Bakken crude to lag significantly behind WTI crude at some points over the past few years. Notably, in early 2012, the differential increased to as much as $27.50 per barrel.
Spread narrowed significantly since early 2012
However, the spread closed in dramatically earlier this year, as companies have successfully found other ways, such as rail, to transport crude out of the area. According to an article by the US Energy Information Administration, “Pipelines are the most cost-effective way to transport crude oil in the United States, but they are expensive to build and may face regulatory hurdles. For these reasons, companies have turned to rail transport to deliver crude oil across the nation.” The surge in Bakken production demanded a quick and efficient takeaway solution, so rail capacity out of the area has greatly increased, and this addition of infrastructure in the region has allowed Bakken crude to reach refining markets on the East Coast, West Coast, and Gulf Coast. As companies found takeaway solutions out of the basin, Bakken traded less than $5 per barrel below WTI for most of 2013, and even traded at points at a premium to WTI. However, as previously noted, the spread has since widened back out to around $10 per barrel.
2014 spread expected to be wider than 2013
Looking to next year, Continental Resources noted on a call discussing its 2014 guidance that it expects wider differentials for its oil production as compared to 2013. Management stated that it expects to receive lower oil prices relative to WTI because it has been shipping much of its crude production to the East and West coasts, where it has been receiving prices for its oil based off Brent. As Continental forecasts the spread between WTI and Brent to close in, it believes the discount received relative to WTI will be greater. However, this change in guidance doesn’t reflect Continental’s fundamental view of the revenue it will receive for its oil, but rather a function of the difference between WTI and Brent.
However, currently, the spread between WTI and Brent has widened, and so the discount that Bakken crude is trading at relative to Brent crude is even wider. The larger Bakken-to-WTI spread and Bakken-to-Brent spread, which has persisted over the past month, is a medium-term negative for companies producing from the Bakken region, such as CLR, OAS, WLL, and KOG.
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