When Will the Brent-WTI Spread Close?

Brent crude has traded at a significant premium to WTI since 2011 -- when will it narrow?

Feb 6, 2014 at 2:32PM

Due to the recent global market correction, the Brent-WTI spread, which at times neared the $20 mark, has narrowed meaningfully.    

The two benchmarks traded at parity for much of the decade until 2011, when Brent, the global benchmark for oil, started trading higher than WTI, the U.S. benchmark. The spread has been a welcome boon for refiners, which use cheap WTI as feedstock, and a bane for pure-play domestic oil producers. 


Source: U.S. Energy Information Administration.                                                                                         

When will the gap narrow again?

Another consequence of the shale revolution
Much of the gap in pricing is due to the enormous increase in domestic production of crude oil due to advances in horizontal drilling and hydraulic fracking. Because production increased so quickly,  the pipelines needed to transport oil and gas cannot be built fast enough.  

A lot of oil is stranded due to infrastructure bottlenecks while a lot of natural gas is still flared. Because of these bottlenecks, the laws of supply and demand have lowered the price of domestically produced oil.

Some possible scenarios that could cause the spread to close
There are some possible outcomes that could actually cause the spread to close permanently. 

One is if OPEC loses its discipline. In an attempt to maintain high oil prices, OPEC currently has a maximum production cap of around 30 million barrels of oil a day. 

Given Iraq's increasing oil production and Iran's soon-to-be-ended sanctions, the cap may be tenuous, however. Saudi Arabia itself has stated that it will not unilaterally cut oil production unless other OPEC countries do as well. 

The spread could also narrow if the United States begins exporting crude oil. While the total amount of crude oil exported may not have a significant effect initially, the mere fact that the United States can export crude could be a catalyst that causes the spread to close.

The bottom line
In the short term, it is uncertain how long the spread can stay as wide as it is. Many believe the gap will hold as long as the U.S. continues to increase oil production. According to the EIA, domestic crude oil output should grow annually by 800,000 barrels a day until 2016 when it tops out.

In the long term, the spread will likely close. Once the red tape is cut and enough infrastructure is built, WTI will trade for the same price as Brent again. 

In that event, domestic pure-plays such as EOG Resources (NYSE:EOG), Continental Resources (NYSE:CLR), and Pioneer Natural Resources (NYSE:PXD)will benefit on a relative basis versus the international oil producers. If WTI increases to Brent's level, the domestic pure-plays will see higher gross margins and greater profits as they realize more for each barrel of crude they produce. 

On the opposite side of the coin, domestic refiners and chemical companies that use WTI as feedstock will see lower margins.

Even though the domestic WTI pure-plays are currently leaving a fortune on the table, the eventual closing of the WTI-Brent spread is another reason to be bullish on their long-term prospects.

Your best bet on energy investing
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!


Jay Yao has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers