Rising Crude Stockpiles Widen Spread Between WTI and Brent Crude

The spread between WTI and Brent crude has been widening as crude stockpiles in the U.S. rise.

Apr 24, 2014 at 1:29PM

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. 

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information