As of June 1, the spread between Brent and WTI – the two major world oil benchmarks – has widened to US$11/b. This is essentially the widest level in 3 years, and although it pales in comparison to the peak spreads of US$26/b in 2012, it also points to some fundamentals issues within crude supply and demand at the moment.
At least until three months ago, the Brent-WTI spread was within the US$4-5/b region. Now it has doubled. What happened? Brent prices have risen some 14% over the past three months, while WTI is up just 7.5%. The last time this happened – in the 2011-2013 period – it was because the US was still maintaining its ban on crude oil exports, which meant that soaring shale oil production was trapped within continental US, and with US refineries geared towards producing heavier, sourer crude grade, the domestic refining industry was not able to convert them into exportable products. Too much oil sloshing around in the US that was trapped, while crudes based on Brent pricing were free to move around the world. The lifting of the crude export ban in 2015 seemed to solve that issue, but now something else has risen its head.
A different bottleneck seems to have emerged – a shortage of pipeline capacity to bring shale supplies to the benchmark delivery point in Cushing, Oklahoma, and then a further shortage of pipeline and port capacity to send US crude to a hungry world market. That’s been depressing WTI prices, but it is also accurate to say that Brent crude is facing issues that are inflating its price levels – causing the growing gap.
With Iran and Venezuela facing new sanctions designed to punish their crude exports, Brent – as the global benchmark – has been spooked into higher levels due to this. Which explains why Russia and Saudi Arabia have made very recent public statements that they are willing to reverse their course of maintaining the OPEC-NOPEC supply freeze levels, in order to keep a lid on soaring prices. Rosneft is already testing for increased crude output capacity and Saudi Arabia seems happy to corral the rest of its OPEC allies into ‘turning the tap of spare capacity on.’ This should help plug any potential gap caused by the departure of Iranian and Venezuelan volumes – which could reach up to 500-600,000 bd. It is almost amusing to see how Saudi Arabia, which only a few weeks ago was championing higher prices while the rest of OPEC was content to have prices stabilise at US$70/b, reversing its position. WTI prices may be depressed now because of infrastructure constraints, but once those are solved – though it may take years – Saudi Arabia does not want to run the risk of encouraging more US shale production that necessary, leading to another oil price crash in the near future. A dramatically widening Brent-WTI is an issue that presages problems in the future; tackling it is a prudent way of mitigating potential threats to the future stability of oil prices.