WTI Had a Volatile Week; Gasoline and Diesel Prices Diverge
WTI-Brent spread
WTI (West Texas Intermediate) crude oil’s discount to Brent crude oil narrowed in the week ended September 4 over the previous week. The differential as of Friday, September 4, 2015, was $3.56 per barrel. On August 28, it was $4.83 per barrel.
Both crude oil benchmarks initially spiked on the revised downward estimates of US crude oil production data by the EIA (Energy Information Administration). However, the news of the lower Chinese PMI (purchasing managers’ index) reading, pulled prices lower, with a more profound impact on Brent. Plus, while the EIA published a bearish inventory report, a drop in Cushing inventories helped WTI prices stay up. Read Part 1 of this series for a summary of last week’s crude oil price (USO) movements.
WTI-Brent spread movements
The WTI-Brent spread has converged significantly since February, when the differential had widened to ~$12 per barrel. As we saw above, it has recently narrowed to levels near ~$4.02 per barrel. In January, the two benchmarks were trading near parity.
Who gains? Who loses?
A narrower WTI-Brent spread is positive for US oil producers such as Occidental Petroleum (OXY) and Anadarko Petroleum (APC). A wider spread means that US crude oil producers are receiving less money for their domestic output than their international counterparts get for their output benchmarked to Brent. A narrower spread reduces the difference.
Combined, these oil-producing companies make up 6.84% of the Energy Select Sector SPDR ETF (XLE). A wider spread could discourage American producers from pumping more crude oil, which is negative for MLP companies such as Plains All American Pipeline Partners (PAA) that transport crude oil.
On the other hand, US refiners such as Phillips 66 (PSX) benefit from a wider WTI-Brent spread. These companies get access to cheaper crude oil than refiners do elsewhere. Plus, these companies get international prices, benchmarked to Brent crude, for their refined products. So, a narrower spread erodes this advantage.
WTI and Brent price forecasts
According to the EIA’s Short-Term Energy Outlook released on August 11, Brent prices averaged $57 per barrel in July, $4 per barrel less than in June. In contrast, WTI crude oil prices averaged $51 per barrel in July, $9 per barrel less than the June average.
The EIA projects that Brent crude oil prices should average $54 per barrel in 2015 and $59 per barrel in 2016. WTI prices are projected to average $5 per barrel less than Brent in both years. The EIA is expected to release its next STEO on September 9.