Earlier this month, the spread between the U.S. benchmark WTI crude and the global benchmark Brent crude had narrowed to around $4, the smallest gap in almost seven months. The narrowing spread between the U.S. and the global benchmark is not good news for U.S. refiners such as Valero (NYSE:VLO), Marathon Petroleum (NYSE:MPC), and Phillips 66 (NYSE:PSX) as it hurts their margins. However, refiners can take heart from the fact that the spread has once again begun to widen due to rising crude stockpiles in the U.S., which have pushed WTI prices lower. At the same time, geopolitical tensions in Ukraine and a cut in Iranian exports could keep Brent crude prices elevated.
Spread widens again
The spread between WTI and Brent had narrowed to seven-month low levels in April due to depleting stocks at Cushing, Oklahoma. The stocks at the storage hub in Oklahoma have been depleting mainly due to the Marketlink pipeline, which began transporting oil earlier this year. Marketlink is now one of the two pipelines, the other being Seaway, that connect Cushing to the Gulf Coast refineries.
The lack of transport infrastructure previously had created a supply glut at Cushing, pushing down WTI prices and widening the spread between the U.S. and the global benchmark. The spread had boosted refiners' margins since they had cheaper feedstock while the prices for their finished refined products were linked to the global benchmark. Narrowing spreads, therefore, are a major concern for refiners. Not surprisingly, they have opposed the lifting of the ban on crude exports from the U.S., a move that could bring WTI and Brent crude prices at the same level.
The spread between WTI and Brent will remain low only in the near-term. The spread should widen again due to increasing U.S. oil production, which would once again create a glut since many of the refineries on the Gulf Coast are not configured to handle the light, sweet crude produced in the U.S. The spread is already starting to widen as crude stockpiles in the U.S. have risen to their highest levels in over eight decades. At the same time, Brent crude prices could remain firm due to geopolitical tensions and a possible cut in Iranian oil exports.
U.S. crude stockpiles rise
According to a report released by the U.S. Energy Information Administration on Wednesday, U.S. crude stockpiles rose by 3.52 million barrels to 397.7 million last week, the highest level since the agency began compiling weekly data. The stocks at Cushing, though, fell by 788,000 to 26 million last week. The high stockpiles suggest that refiners are not able to process surging domestic oil production. Not surprisingly, the largest increase was on the Gulf Coast where stockpiles rose to 209.6 million barrels. As I noted before, many refineries on the Gulf Coast are not configured to process light, sweet crude produced in the U.S.
Brent crude could remain steady
Higher inventories in the U.S. could keep WTI prices under pressure. At the same time, Brent crude prices are expected to remain firm due to rising geopolitical tensions in Ukraine. The spread between WTI and Brent has already risen to around $8, nearly double what it was earlier this month. Brent crude prices could also get a boost from lower Iranian exports in the coming months.
Data released earlier this month showed that Iranian crude exports in February were 1.65 million barrels per day, which is above the 1 million barrel per day limit set under a deal signed in November to curb the country's nuclear program. The International Energy Agency (IEA) further noted that initial data for March suggests that exports from Iran dropped to 1.05 million barrels per day in March. However, that figure is expected to be revised upwards. Most likely, the figure for March will be close to February levels. That would mean Iran would be under pressure in the coming months to lower its exports to bring down its average to 1 million barrels per day.
All eyes on refiners
Meanwhile, all eyes will be on refiners over the next week as they prepare to release their financial results for the first quarter. Valero will release its first quarter results on Tuesday, April 29. In the fourth quarter of 2013, the company reported adjusted earnings of $1.78 per share. The next day Phillips 66 is scheduled to release its results. Marathon Petroleum will release its first quarter results on Thursday, May 1. Marathon reported adjusted earnings of $2.10 per share for the fourth quarter. All three companies beat consensus earnings forecasts in the fourth quarter of 2013.
Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.