Brent-WTI price gap is shrinking, raising US influence on global oil markets
The ever-narrowing price gap between the world's twin crude oil benchmarks Brent and West Texas Intermediate has profound consequences across the supply chain for various stakeholders in the oil industry, including producers, refiners, traders and even consumers.
The futures prices of WTI and Brent oil over the past 13 years are heading much closer.
On June 30, 2011, Brent commanded a premium of $17.06 a barrel against WTI on futures exchanges. Fast forward to today, that premium has dwindled to a mere $3.14.
The narrowing gap is largely beneficial for US producers as they benefit from higher relative prices for WTIpriced crude, while European sellers of Brent-linked crudes may see reduced premiums.
However, the case is reversed for consumers.
“A wider spread often means lower prices for US consumers and higher prices for European consumers, while a narrower spread tends to align these prices more closely,” says Marc Pussard, head of risk at APM Capital.
Changes in the Brent-WTI spread can ultimately create major rifts that affect the prices of petrol and other refined products globally.
“This dynamic could influence production strategies and investment decisions in different oil-producing regions,” says Mohamed Hashad, chief market strategist at Noor Capital.
For example, a narrower spread means more challenges for oil producers who market Brent-linked crudes.
“Lower value added in Brent may leave less margin for producers based in regions such as the North Sea, Africa or even some parts of the Middle East, squeezing their profit margins,” says Mr Hashad.
Brent, which is traded on the Intercontinental Exchange, also known as Ice, is the world's most widely used reference for oil buyers, sellers, and traders. WTI, which is traded on the Nymex futures exchange, is the preferred measure and price benchmark for crude oil in the US and accounts for a 20pct share of the world's global crude benchmarks.
Another distinction between the two lies in their sulphur content, with WTI having a lower level compared with Brent, thus making it easier to refine than its North Sea rival. This variance, coupled with various logistical, regulatory and demand influences, frequently results in disparities in pricing.
For example, a noticeable gap emerged between Brent and WTI prices from 2011 to 2014, attributed to the surge in US shale oil production and the presence of transport obstacles within the US.
As bottlenecks began to form, WTI prices took a hit as they were discounted to account for the increased expenses of transporting barrels to market due to the lack of sufficient pipeline capacity.
“As the shale revolution ramped up last decade, US light sweet production produced in the Bakken, Permian and other shale plays had few outlets to international markets, since US law at the time prohibited crude exports,” says Aaron Brady, executive director of crude oil research at S&P Global Commodity Insights.