Must-know: Why the WTI-Brent spread is widening

Avik Chowdhury

Must-know: What's up with crude oil prices? (Part 4 of 4)

(Continued from Part 3)

WTI-Brent widening

While both Brent and West Texas Intermediate (or WTI) prices have been on a steady decline due to the easing of supply concerns lately, WTI has come under additional pressure for specific reasons—covered in earlier parts of this series.

This has caused the already volatile WTI-Brent spread to widen.

After yesterday’s expiry of the September WTI crude futures contract on the Nymex, the October contract—trading at a sharp discount compared to the September contract—failed to increase much in response to the U.S. Energy Information Administration (or EIA) inventory data.

This kept the spread at well above $8 per barrel.

Why you should watch the WTI-Brent spread

A wider WTI-Brent spread is profitable for U.S. refineries. Cheap inputs, in the form of lower priced crude, are an advantage for refineries. U.S. refineries are profitable when their products are benchmarked by more expensive Brent crude.

A wide WTI-Brent spread is good for refinery margins 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 also components of the Energy Select Sector SPDR ETF (XLE).

Cheaper WTI crude would also mean that U.S. oil companies receive lower prices for their domestic crude compared to their international peers.

Local developments key

Local factors have been involved in keeping WTI substantially cheaper than Brent. As a result, investors in U.S. oil companies and refining companies need to keep an eye on factors that may impact the spread.

The recent boom in U.S. crude production—driven by shale and fracking—combined with a ban on domestically produced crude exports, is one of the most important factors to watch. See Part 1 of this series for production trends.

Also, to learn more about U.S. policy on crude exports and potential changes, check out our series Must-know: US oil industry reaction to the loosening export ban.

Investors also need to watch inventory levels at Cushing, Oklahoma. It’s the delivery and pricing point for WTI crude oil. In the past few years, rising inventories at Cushing have contributed to the deep discount in WTI prices. See Part 3 of this series for recent trends in Cushing’s inventories.

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