Brent-WTI Differential To Narrow – Analysis

The differential between the spot prices of Brent and West Texas Intermediate (WTI) crude oils, referred to as the Brent-WTI spread, averaged $19 per barrel in August 2012. According to the U.S. Energy Information Administration’s (EIA) September Short-Term Energy Outlook (STEO), the spread, which reflects differences in transportation costs, crude oil quality, and production or distribution system operating constraints is expected to drop to about $9 per barrel by the end of 2013. It should narrow further in 2014 as pipeline capacity to deliver WTI crude oil to refineries on the U.S. Gulf Coast (USGC) expands.

Historically, the Brent-WTI spread ranged from about ± $5 per barrel. However, in early 2011, the startup of the TransCanada Cushing Extension (Keystone Phase 2) pipeline, which allowed greater volumes of Canadian crude oil to be moved into Cushing, caused the price of WTI to decline versus Brent, increasing the spread from around $4 per barrel in early 2011 to almost $30 per barrel by September 2011 (Figures 1 and 2).

Because its quality is similar to that of WTI, Brent crude can be substituted for WTI to meet delivery obligations against New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil futures contracts. Prior to 2011, Brent could be economically brought into the United States by tanker and moved by pipeline from the USGC to Cushing, Oklahoma. On average, Brent crude oil traditionally sold at a small discount to WTI, reflecting marine and pipeline transportation costs.

With increased crude oil production from U.S. tight oil plays, particularly from the Williston Basin in North Dakota, and the February 2011 start-up of the Keystone Phase 2 pipeline from Steele City, Nebraska to Cushing, crude oil inventories in Cushing began to rise because there were no pipelines to move this new volume of crude, which exceeded the demand from Midwest refiners, from Cushing to Gulf Coast refineries. A few months before the TransCanada pipeline was completed, the Brent-WTI differential started to rise, from an average $2 per barrel in December 2010 to an average $15 per barrel in February 2011. The WTI discount reached a high of about $29 per barrel in September 2011.

The reversal of the 150,000-barrel-per-day (bbl/d) Seaway pipeline between Cushing and the Gulf Coast in the fourth quarter of 2011 contributed to a decline in the Brent-WTI differential to an average of $9 per barrel in December 2011. However, by March 2012, as it became clear that the Seaway reversal would be insufficient to clear the bottleneck between Cushing and the USGC, the WTI discount rose back to an average $19 per barrel. Over the last five months the monthly average Brent-WTI differential has ranged from $13 per barrel to $19 per barrel.

EIA expects the Brent-WTI crude price differential to contract as new Cushing-to-USGC pipelines are built and existing pipelines expanded. The planned capacity additions should reduce the differential as the increased capacity helps balance crude supply and demand in Cushing, while supplying the Gulf Coast with additional crude. The Enbridge/Enterprise Seaway pipeline is expected to expand its capacity from 150,000 bbl/d to 400,000 bbl/d by early 2013 and then to 850,000 bbl/d by mid-2014. TransCanada’s Gulf Coast Pipeline project is expected to add between 700,000 and 830,000 bbl/d of capacity from Cushing to the Gulf Coast in late 2013.

The relationship between WTI and Brent appears to have undergone a fundamental change. New pipeline capacity from Cushing to the Gulf Coast will make it unlikely that light sweet crudes will move from the Gulf Coast to Cushing for delivery against WTI futures contracts as in the past. This suggests that the historical WTI premium to Brent in the futures market is unlikely to return.

Gasoline and diesel fuel prices increase again

The U.S. average retail price of regular gasoline increased less than a penny to $3.85 per gallon, 19 cents per gallon higher than last year at this time. The largest increase came in the Rocky Mountain region, where the average price is up six cents to $3.70 per gallon. The West Coast price increased a penny to $4.08 per gallon. East of the Rockies, the Gulf Coast and Midwest prices fell to $3.64 per gallon and $3.86 per gallon, respectively, while the East Coast price is $3.83 per gallon, up two cents from last week.

The national average diesel fuel price increased half a cent to remain at $4.13 per gallon, 27 cents per gallon higher than last year at this time. The largest increase came in the Rocky Mountain region, where the price increased two and a half cents to $4.24 per gallon. The Midwest and East Coast prices were both up a penny, to $4.08 per gallon and $4.11 per gallon, respectively. On the Gulf Coast, the average price fell half a cent to $4.02 per gallon, while the price on the West Coast is down a tenth of a cent to remain at $4.42 per gallon.

Propane stocks show a slight build

U.S. propane inventories showed signs of leveling off last week, as total stocks grew by 0.2 million barrels to end at 72.7 million barrels, roughly 33 per cent higher than the same week last year. The Midwest region added the most inventory, growing by 0.3 million barrels, while Gulf Coast stocks fell 0.3 million barrels. The East Coast and Rocky Mountain/West Coast regional inventories were both up 0.1 million barrels. Propylene non-fuel-use inventories represented 6.6 percent of total propane inventories.