The gap in prices between the global futures benchmark, Brent, and the U.S. benchmark, West Texas Intermediate, rose last week to levels not seen in three years, highlighting the infrastructure constraints U.S. crude faces.
The spread averaged $11 a barrel (Bbl) on Friday, reaching as much as $11.37/Bbl from peaks of $77.61/Bbl for Brent and $66.24/Bbl for WTI, by 1:16 pm EDT. Such a wide gap hasnt been seen since February 2012, Kallanish Energy reports.
Spread peaked in 2012
In 2012, the difference between the prices hit a peak of $26/Bbl. Then, the U.S. had an oil exports ban which trapped shale production within the continental U.S., and refineries were geared towards utilizing a heavier, sourer crude grade.
The refining industry wasn’t able to convert to exportable products and, while U.S. oil was trapped, crude based on Brent pricing was free to move around the world.
Now, the problem seems to be a bottleneck in the Permian Basin preventing the oil from physically reaching the storage point for West Texas Intermediate: Cushing, Okla.
Capacity also a problem
A shortage of pipeline and ports capacity is also preventing U.S. shale oil from entering global markets, thus the inability to keep pace with Brent futures.
In the past three months, the Brent-WTI spread has been roughly $4-5/Bbl. In this period, Brent future prices rose 14%, but WTI only 7.5%.
Michael Tran, RBC Capital Markets commodity strategist said in a note last week WTI in general is being anchored by Midland, Texas, bottlenecks and pricing along the lines of stranded Permian barrels than WTI-Houston.
Research and analytics firm Market Realist noted a wide spread usually spurs U.S. oil producers to export more oil, but also benefits crude oil refiners in the country.
Wide spread can help refiners
When the Brent-WTI spread is wider, U.S. refiners input costs are lower compared to international oil peers. A wider spread also means higher output prices because refined products are benchmarked to Brent prices. The combination benefits U.S refiners, it said.
The widening spread and record U.S. crude oil output could increase U.S. crude oil exports, Market Realist said, in a note. High U.S. oil exports could support WTI oil prices and pressure Brent oil prices, which would cause the Brent-WTI spread to eventually narrow.
U.S. will dominate growth
Colin Davies, analyst at AllianceBernstein, said a $10/Bbl Brent-WTI differential will become an investment factor between U.S. and international markets.
The still lower-cost base and shorter cycle of U.S. onshore production compared to international oil company-led offshore activity and rig count outside the Permian will still allow the U.S. sector to dominate growth, with strong economics at $63/Bbl WTI, he noted.
This article provided by NewsEdge.