Energy Stat of the Week by J. Marshall Adkins

Energy Stat: What's Going on With the Brent-WTI Spread "Blowout" and How Long Will it Last?

November 13, 2017

While it took six months longer than it should have, oil prices have finally begun to respond to sharp drawdowns in U.S. oil inventories. Just two months ago investors were constantly questioning the sanity of our $65/Bbl forecast for next year while last week oil prices actually closed just shy of $65/Bbl --- for Brent pricing. Unfortunately for many (non-refining) U.S. investors, the price difference between international crude (e.g., Brent) and the U.S. benchmark (WTI) has disconnected in the past couple months. In fact, the price spread between Brent and WTI has averaged over $6/Bbl since the beginning of September with the benchmark U.S. crude getting one of the lowest (quality adjusted) prices in the world. So, what gives? Are we set for a return to the “blowout” WTI price differential days of 2011-2013 (as shown below), or is this a temporary hiccup that will be resolved in short order? In today’s Stat, we’ll discuss 1) reasons for the recent widening of Brent-WTI, 2) our short-term and medium/long-term outlook for these WTI price differentials, 3) what it means for U.S. crude oil exports (along with a view of our export capabilities), and 4) the impact upon various energy sub-sectors (e.g., positive for refining). In short, we believe the current spread of nearly $7/Bbl is too high, but our prior medium/long-term view of a Brent-WTI differential ($3/Bbl) is probably too low. Either way, a higher longer term spread benefits U.S. refiners and will incentive greater Cushing takeaway capacity and continued growth in U.S. crude oil exports.