Is The Widening Brent-WTI Spread Sending A Message To The Oil Market?

Is The Widening Brent-WTI Spread Sending A Message To The Oil Market?

The price differential between Brent and WTI crude oil can be a critical piece of fundamental data when it comes to predicting the path of least resistance of the price of the energy commodity.

Brent crude oil is the benchmark pricing mechanism for two-thirds of the world’s petroleum including oil coming from Europe, Africa, and the Middle East. WTI or West Texas Intermediate oil comes from North America and is a pricing benchmark for around one-third of the world’s oil. Producers and consumers around the globe monitor the prices of both reference prices.

WTI crude oil is a lighter and sweeter crude oil when compared to Brent which means it has a lower sulfur content. WTI is more favorable for refining into gasoline while Brent crude’s composition is more appropriate for processing into distillate products like heating oil, diesel, and jet fuels. For many years, WTI traded at a small premium to Brent crude because gasoline is the most ubiquitous oil product. Over the past decade, that has changed.

The price differential between the two petroleum benchmarks is a barometer for the demand for gasoline versus distillates, but it is much more. Since the majority of Brent production comes from the Middle East, which is the most politically turbulent region in the world, the spread also monitors political risk in the crude oil market. Typically, a higher Brent premium tells us that risk is rising in the crude oil market while a lower Brent premium is a sign of calm in the Middle East. In the aftermath of the Arab Spring in 2010, the premium for Brent over WTI rose to over $25 when the price of both crude oils was over $100 per barrel. More recently, rising US production and production cuts by OPEC have caused Brent to command a higher price than WTI crude oil.

There is a strong correlation between the width of the Brent-WTI spread and the price of crude oil. A wider spread tends to support higher oil prices while a narrowing spread is a bearish sign for the energy commodity.

The price of WTI oil recently rebounded significantly after falling from highs at $76.90 in early October. After declining to a low at $42.36 on December 24, it rose to its most recent high at $55.75 per barrel on February 4. In a sign of continued strength for the crude oil market, the Brent-WTI spread has been moving higher over recent sessions.  

Source: CQG

As the chart highlights, the nearby Brent premium moved from a low at $6.65 per barrel on January 31 and to a high at $9.13 last Friday. The premium expanded for the past six consecutive sessions.

The trend in crude oil has been higher since the Christmas Eve low. The price action in the Brent-WTI spread is another supportive factor for the price of crude oil. The critical level to watch in the spread is the 2018 high at $11.55 per barrel. A move towards or above that level would likely be supportive of further gains in the price of the energy commodity. 

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