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WTI-Brent Spread Narrows Due to Lower Production and Iran Deal

Keisha Bandz

US Crude Production Declines as Cushing Continues to Pressure WTI (Part 10 of 10)

(Continued from Part 9)

WTI-Brent spread

The divergence between WTI and Brent considerably narrowed last week compared to the week prior. WTI saw support from declining US production, while both Brent and WTI were impacted by the Iran-US nuclear deal. Read the previous part of this series for more detail. The differential narrowed to levels close to ~$5.6 on April 2.

In February, the differential between the two benchmarks widened to ~$12. Increasing domestic supplies had kept WTI from advancing as much as Brent last month. Refinery outages also impacted WTI prices.

It’s interesting to note that the benchmarks are now again trading close to each other, compared to February. In January the benchmarks were trading near parity. This clearly shows how volatile global oil markets have been over the last few months.

A narrower WTI-Brent spread is a positive for US producers, but a negative for US refiners. Refiners such as Valero Energy (VLO), Phillips 66 (PSX), and Marathon Petroleum (MPC) benefit from a wide spread, as they have access to cheaper crude versus refiners elsewhere. These companies also get international prices that are benchmarked to Brent crude for their refined products, which don’t have export impositions. So, a wider spread enhances their profitability.

All these companies make up ~5.5% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and 7% of the Energy Select Sector SPDR ETF (XLE).

Read Market Realist’s Energy and Power page for the latest updates on the energy sector.

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