Spread between WTI & Brent crude near 33-month low

Spread between Brent crude and WTI at 33 month low, to widen next year

After narrowing to close to the 33-month low of $1.19 a barrel, the spread between Brent crude oil and West Texas Intermediate (WTI) recovered a bit on Thursday. Despite their comparable quality, Brent was selling for 20-25 per cent more than WTI a few years earlier.

The spread was as high as  $29.70 a barrel in September 2011, when Brent crude was $109.96 a barrel, as compared to $80.26 for WTI. Currently, Brent is quoted at $107.37 a barrel and WTI at $104.91.

Morgan Stanley says the spread will widen to $12 a barrel in 2013 and $11 a barrel in 2014, with potential for a rise in crude oil prices.

“With the spread narrowing, we should see demand for crude from West Africa and the North Sea increasing, which will further help to support Brent prices in the weeks to come and, thereby, could increase import and domestic oil product prices for India,” said Abhishek Deshpande, oil markets analyst with Natixis Commodities Research, a London–based global advisory firm.

The current narrowing seems to be on the back of high crude drawdowns due to two main factors. One is high refinery utilisation rates in the US, which are above the five-year high, thanks to high domestic demand. The second factor is net oil imports into the US are down by 12 per cent over a year.

Natixis thinks the momentum in WTI oil prices could see it rise above Brent for a very short period but this is unlikely to last. An arbitrage window is opening up for West African and North Sea crude to be transported to East Coast refineries in the US.

The recent news on the US Federal Reserve’s policy on tapering interest rates has coincided with dovish comments on growth from Chinese premier Li Keqiang, helping to push most commodity prices upward in general.

“The fundamentals for the two commodities differ. While WTI is concerned with more of Middle East issues, WTI takes note of the US and European developments. India is connected with WTI and, hence, the concerns of the Middle East issues would impact us,” says Deshpande.

The dynamics of the WTI-Brent spread have shifted dramatically over the past several years in the wake of the US shale revolution. Aging American infrastructure has not been able to keep up with the massive production increase, creating large bottlenecks in the system.