The Rise and fall of the Brent Premium over WTI

During 2011 the premium of Brent oil over the WTI reached the highest levels ever and even peaked on September 29th to a premium of $29.47. As the gap between these energy prices shrink what is next for this difference for the weeks to come?

The prices of crude oil started the year at nearly $90 range for WTI oil price and $95 for Brent oil. The gap between the two commodities prices was mostly in single digit numbers during January and the beginning of February. This gap was new and was mostly related to the decline in demand for WTI oil that was stocking up in Cushing due to bottlenecks in transportation. This matter is still among the factors affecting the discount on the WTI oil prices. A symptom of this problem is that the U.S. oil stockpiles reached the highest levels ever during the end of 2010.

Crude spot oil price forecast 2011 Brent oil and WTI spot oil  DURING 2011 November 28

But the uprise in the Middle East was probably among the reasons to pressure Brent oil price to rise by a higher rate than WTI oil price. The uprise in Egypt and then Libya pressured crude oil prices to reach their highest level in 2011 (up to date) of $126 per bbl for Brent oil price and $113.39 per bbl for WTI oil price on April 29th, 2011.


Difference between Brent and WTI crude spot oil price DURING 2011 November 28

As the uprise in Libya has ended the oil production of Libya, which was once at 1.6 million bbl per day as of 2010, and then declined to zero during the months of the Libyan civil war, started to rise again and stood on 350 thousand bbl/d during October 2011. OPEC also raised its quota during that time in order to ease the upward trend of crude oil prices.

During the last couple of months, crude oil price premium of Brent oil over WTI sharply fell from a range of $22-$30 per bbl during August and September to nearly $8-$15 per bbl during the past couple of weeks of November.

Even though the markets already assume that the Libyan oil production will continue to rise, there are still perils that could affect the premium of Brent oil price over WTI including the recent sanctions made by the European countries on Iran. This issue might keep the Brent oil higher than WTI but it won’t necessarily cause this premium to reach the high levels of August and September.

Furthermore, the Seaway oil pipeline reversal is suppose to help with the transportations problems of oil that were mentioned above and perhaps help decrease the discount on WTI oil price.

Therefore it is likely that Brent oil will continue to have a premium over WTI oil but at a lower rate than in the past. And unless there will be a significant event in the Middle East that could adversely affect the oil production of OPEC countries (e.g. Iran), the Brent oil prices aren’t likely to rise by a higher rate than WTI oil price.

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Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.