Brent/WTI Gap Will Stay Wide Editor: For many years the price of WTI (West Texas Intermediate Crude) and Brent crude oil moved in lockstep. However, starting in late 2010 the two began to diverge. Today a barrel of WTI costs $93.37 while Brent costs $106.34. The decline in the price of WTI relative to Brent has been largely due to the flow of new oil into Cushing, Oklahoma (the delivery point for US crude), thanks to the shale oil revolution. In addition, although most Brent is destined for European markets, it has established itself as the price benchmark for other oil grades. As Bloomberg reports, “Brent represents the Northwest Europe sweet market, but since it’s used as the benchmarks for all West African and Mediterranean crude, and now for some Southeast Asia crudes, it’s directly linked to a larger market.” Both WTI and Brent crude are classified as “light”, “sweet” crude oil – light referring to the API gravity (a measure of how heavy or light a petroleum liquid is compared to water), and sweet referring to the percent of sulphur it contains. However, Brent crude is actually a blend of oil from fifteen different oil fields in the North Sea and it is not quite as light, nor as sweet as WTI.

The narrowing of the Brent/WTI spread is due to the pullback in Brent prices versus heavier crude grades, not an improvement in U.S. transportation bottlenecks. The corollary is that this spread compression is at a late stage.


U.S. oil shipments by rail are at an all-time high and there is no reason to expect that WTI dislocations should disappear. The Keystone XL project will likely be approved by the end of summer, but we expect WTI discount relative to Brent to last well into 2014.

U.S. refiners will continue to benefit from a discounted crude price structure relative to their global counterparts. All else equal, the spread compression is negative for refiners, but our refiners stock bet was never based on a $20-25 price gap. Even a $8-12 spread will allow for generous profits, through a combination of wide cracks and competitive international prices for petroleum products.

The bottom line

The Brent/WTI spread will not narrow sustainably from current levels at least until mid-2014. Stay long U.S. refinery stocks.

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