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Why WTI Crude Oil Could Trade at a Premium to Brent Oil in 2016

Gordon Kristopher

Will WTI Crude Oil Outperform Brent Crude Oil in 2016?

(Continued from Prior Part)

WTI and Brent crude oil prices 

February WTI (West Texas Intermediate) crude oil futures contracts closed at $29.42 per barrel on Friday, January 15, 2016. Likewise, Brent crude oil futures closed at $28.94 per barrel on January 15, 2016. The WTI-Brent spread was at $0.48 per barrel on the same day. Currently, WTI trades at a premium to Brent crude oil. Historically, Brent crude oil has traded at a premium to WTI crude oil. The WTI-Brent spread peaked at $14 per barrel in February 2015. This simply means that WTI crude oil was $14 per barrel cheaper than Brent crude oil.

US crude oil export ban 

In 1975, the United States government banned the export of US crude oil due to a domestic shortage. However, due to technological advancements, higher crude oil prices between 2010 and 2014, and cheaper credit facilities, the United States scaled up production, which led to the oil oversupply in 2014 and 2015. Thus, in December 2015, the US government lifted the crude oil export ban. US oil producers like ConocoPhillips (COP) and Pioneer Natural Resources (PXD) had been pushing the government to lift the ban.

The lifting of the export ban could provide higher oil prices for WTI crude oil producers. Also, the light sweet crude oil from the United States could also boost US crude oil prices. However, there is speculation that the current WTI-Brent spread makes US crude oil exports unviable. There is also a theory that increased exports could lead to a supply drop and stronger domestic demand, which could boost US oil prices. Read more about the US and global demand during the major economic crisis in the fifth part of this series.

Traders speculate that the globally traded Brent crude oil could see more pressure than US crude oil. Read more about this in the next two parts of this series. Hess Corporation (HES) suggests that the lifting of the oil export ban is a welcome move, and we could see WTI crude oil trade more than $4 per barrel higher than Brent crude oil in the long term.

Higher WTI prices negatively affect US refiners like Tesoro Corporation (TSO), Valero Energy Corporation (VLO), and Phillips 66 (PSX). However, they benefit US oil producers. The volatility in the oil and gas market also affects ETFs and ETNs like the Vanguard Energy ETF (VDE), the iShares U.S. Oil Equipment & Services ETF (IEZ), the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the VelocityShares 3x Long Crude Oil ETN (UWTI), and the First Trust Energy AlphaDEX Fund (FXN).

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