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16 Feb 2016
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 Tuesday 16 February 2016

PM Bulletin: WTI and Brent

 

 

There are many different oil benchmarks. Each one corresponds to the geographical region where the oil comes from. However, there are three main ones: Brent, West Texas Intermediate (WTI) and Dubai/Oman. Brent refers to oil from the North Sea; WTI is the benchmark for US production while Dubai/Oman is the main reference price for oil from the Middle East. The latter is a heavier product with a higher sulphur content, whereas Brent and WTI are considered light and “sweet” and good for refining into fuels such as kerosene (for jet engines), petrol and diesel. All three trade freely and have an associated futures market. However, most of the trading volume takes place in Brent and WTI with Brent volumes being highest.

Over the medium to long-term Brent and WTI tend to track each other quite closely. However, there are times when the prices can diverge and the spread between the two contracts widens. This was particularly noticeable from 2011 to 2013 when Brent regularly traded at a premium to WTI of over $20. The reasons were fairly specific, but the spread gradually reduced as US demand for Brent fell as WTI production increased. Improvements in US infrastructure also helped to narrow the spread.

But more recently the spread fluctuated due to geopolitical concerns. For instance, hostilities in the Middle East are seen as more of a threat to Brent supplies than WTI.

With oil prices so low and volatility high the spread of Brent over WTI seems less of an issue than it used to be. But that will probably change as the industry cuts back and differences in costs of production become more apparent. At the beginning of this year Oil & Gas UK (OGIK) reported that output from the UK Continental Shelf rose around 8% in 2015 from the previous year or to 590 million barrels up from 545 million. Yet recent cut-backs by the oil majors means that production looks set to fall dramatically over the next five years.

Meanwhile, in the US the rig count (left hand scale) is already down sharply, yet production has held remarkably steady. If this continues, then we could see the Brent-WTI spreads widen again.


  

   
 
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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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