What's Driving The Shrinking Brent:WTI Oil Price Spread?
Ellen Wald | Jan 31, 2018 05:30
The price differential between WTI (the U.S. benchmark) and Brent (the international benchmark) is shrinking. Last month Brent was $7 per barrel more than WTI, but this differential (often called a “spread”) has now dropped to only about $4 per barrel. If current market conditions continue, we could see the two converge even more.
WTI is considered a light, sweet type of crude oil. Brent is also considered a sweet crude, though it contains more sulfur than WTI.
Another major difference between WTI and Brent: for many years, due to the 1975 U.S. crude oil export ban, U.S. oil could not be sold outside of the United States. This changed in January 2016, when Congress lifted the ban and permitted U.S. producers to export crude oil produced in the United Sates.
For many years, WTI and Brent were traded at nearly the same price. In fact, for many years, the price differential was barely $1. However, in 2011, the prices of WTI and Brent started to diverge significantly. Since that time, WTI prices have been noticeably—and at times significantly—lower than Brent. This was directly connected to an increase in the production of light, sweet crude in the U.S. and the prohibition on its export.
In 2014, Brent and WTI prices briefly approached convergence, though WTI still remained a few dollars below Brent. It was expected that the price differential between WTI and Brent would decrease when the crude oil export ban in the United States was lifted. However, a variety of factors kept WTI prices lower than Brent prices in 2017.
- Poor infrastructure in the United States has made it difficult to bring WTI to the global market and forced producers to price it lower than the international benchmark.
- Hurricanes disrupted oil exports and refineries on the Gulf coast. This caused crude oil inventories to build up and drove the price of WTI down for several months, whereas Brent remained steady.
- Disruption of the Forties pipeline in the North Sea shut down production of oil in that area for a time. This caused Brent prices to rise more than WTI.
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By early January 2018, the disruptions from the hurricanes and the Forties pipeline were resolved, and the WTI and Brent spread now reflects this. The price differential has dropped by 40%.
U.S. crude oil stocks have been falling, new pipelines have opened and oil exports have increased. All of these factors have helped reduce the spread, though it still remains larger than pre-2011 levels. If these trends continue, it is possible that the price differential between Brent and WTI could shrink further and even become irrelevant—at least for a while.
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