Will WTI Crude Oil Trade at a Premium over Brent Crude Oil?
What's the Impact of a Narrow WTI–Brent Spread on US Producers?
WTI–Brent spread
The WTI (West Texas Intermediate) crude oil discount over Brent crude oil narrowed from $2.15 per barrel for the week ended December 18 to $0.07 per barrel on December 22. In the past two days, the WTI–Brent spread narrowed by almost 96%.
The movements of the WTI–Brent spread
The rise in crude oil production dragged crude oil prices to an 11-year low. The analysts expecting lower crude oil prices seem like they will continue to do so until crude oil producers shut down their operations due to high debt and financial losses. Global oversupplies had a greater impact on Brent crude oil prices in comparison to WTI’s crude oil prices (USO), so the WTI–Brent spread narrowed.
WTI crude oil traded at a premium over Brent crude oil in 2010. Because of the US shale oil boom, crude oil production in the United States rose, leading to massive crude oil inventory builds in the country. At one point, Brent crude oil traded at an all-time high of $28 per barrel over WTI crude oil prices. After that, the WTI–Brent spread appeared volatile at $5—$20 per barrel, to finally narrow to $0.07 per barrel on December 22.
The removal of the US ban on exporting crude oil—not to mention OPEC’s stance on current production to defend its market share—will add further glut to the market. On the other side, tightening US crude oil supplies could result in the trade of WTI crude oil premium over Brent crude oil in the near future.
Impact of a narrowed WTI–Brent spread
A narrowed WTI–Brent spread has a positive impact on the revenues of US oil producers as it leads to the same prices for WTI crude oil that’s domestically produced as well Brent crude oil that’s international benchmarked. In turn, this encourages US oil producers to export their products.
When exports increase, that raises the revenues and profitability of crude oil producers like EP Energy (EPE), Oasis Petroleum (OAS), Apache (APA), Anadarko Petroleum (APC), Occidental Petroleum (OXY), ConocoPhillips (COP), and Hess (HES).
Apache (APA) accounts for 3.7% of the Energy Select SPDR ETF (XLE).
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