West Texas Intermediate (“WTI”) and Brent are the two contract types that dominate futures markets for crude oil. WTI is considered the benchmark for US-produced crude oil, while Brent is considered an international benchmark, based on crude oil extracted from the North Sea.
Historically WTI traded at a premium against Brent
- This was largely due to its slight difference in composition; WTI is a lighter sweeter crude
- The associated production and transport costs are also lower for WTI (as an inland crude) than that of Brent, a seaborne crude
Source: Bloomberg, Abbey Capital
In 2010 the relationship changed and Brent started to trade at a premium
- The US shale oil revolution, which increased the supply of WTI, was a primary driver of the shift
- The US ban on crude oil exports (between 1975 and 2015) meant that the higher US output couldn’t access international markets, providing a further headwind to WTI
- When the export ban was lifted, the spread between Brent and WTI narrowed, although WTI continued to trade at a discount to Brent
In June 2018, global trade concerns saw the Brent-WTI spread widen to $11, its widest level since 2015
- Proposed Chinese import tariffs on US energy products saw WTI underperform Brent for a period.
- This later unwound in June, as supply disruptions in Canada saw WTI rise sharply, outperforming crude and helping the Brent-WTI spread to narrow.
- Geopolitics in the Middle East has been another driver of the spread; for example, the US withdrawal from the Iran nuclear deal, generally had a larger impact on Brent than on WTI.
- The continued increase in US crude oil output is a further factor that has impacted the spread between the two contracts.
Crude Oil – 2018 Summary
Both Brent and WTI crude oil contracts have trended higher in 2018, rising over +19% as of the end of June, despite some periods of volatility and choppy price action.
The main drivers of crude oil this year have been:
- OPEC supply cuts, which were extended in late 2017, provided support for crude early in the year along with ongoing signs of improving global demand.
- Geopolitical developments, such the US withdrawing from the Iran nuclear deal, have also provided a tailwind to crude oil.
- These factors helped to offset OPEC’s decision to raise its supply cap modestly and the continued increase in US production, which reached a 47-year high earlier this year.
Source: Bloomberg, Abbey Capital
Going forward, global trade, along with other geopolitical developments and the status of US production, remain potential drivers of crude oil prices. OPEC, and the future of the current output caps OPEC are currently observing, is another important consideration for investors, and a potential catalyst of volatility and trends in markets.
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