Must-know: Why WTI-Brent spread springs back

Market Realist

Crude oil swings to 6-month lows and natural gas is unpredictable (Part 5 of 7)

(Continued from Part 4)

WTI-Brent spread springs back

The spread between West Texas Intermediate (and WTI) and Brent crude represents the difference between the two crude benchmarks. WTI represents the price oil producers receive in the U.S. and Brent represents the prices received internationally.

Although both crudes have similar qualities, the prices have differed greatly recently because of the production surge in the U.S., causing an inventory build-up at Cushing, where WTI is priced.

WTI-Brent narrowed last week

The WTI-Brent spread closed at $7.67 per barrel on Thursday, August 6, compared to $7.85 per barrel at the prior week’s close. However, following the stronger drop in WTI in light of the refinery outage near Cushing, the spread has now expanded back to well over $8—levels last seen in June.

The Brent fell to its lowest since November last year, to $104.59 per barrel, while WTI crude prices fell to a six-month low of $96.92 per barrel.

Why Brent prices fell last week

Brent crude declined as geopolitical risk subsided as Israel withdrew troops from Gaza indicating that tension will recede between Israel and the Gaza Strip. Middle East tensions subsided further as militant advances slowed down in Iraq.

Tensions in the Middle East typically threaten disruption of oil supply. As a result, Brent had been trading higher. However, an easing of tensions has caused the geopolitical “risk-premium” for Brent to decline.

A narrower Brent-WTI spread hurts the margins of refineries because cheap inputs in the form of lower priced crude is an advantage they currently enjoy.

If WTI-Brent were to narrow, it would hurt the margins of refineries such as Valero Energy (VLO), Phillips 66 (PSX), HollyFrontier (HFC), and Marathon Petroleum (MPC). It’s important to note that most of these companies are components of the Energy Select Sector SPDR ETF (XLE).

Outlook

The increased transportation capacity from Cushing to demand centers, such as refineries on the Gulf Coast, is bullish for WTI crude oil prices. As Brent sees a downward trend due to an easing of supply concerns in the Middle East, it’s likely that this could bring WTI and Brent prices closer together.

The next section in this series will cover changes in natural gas inventory levels and natural gas prices.

Continue to Part 6

Browse this series on Market Realist:

View Comments (0)