The gap between the crude oil price WTI and Brent oil price has reached on Monday a new high, at 19.46$/b. This is the largest gap it recorded in over in 23 years. Yesterday the gap was a bit smaller – 19.35$/b.
Is it that important? Is it that interesting?
As you may know Brent oil originates from the North Sea, and as such is mostly exported to Europe, while WTI oil is based in Texas and southern Oklahoma, i.e. its price pertaining to the North America crude oil market.
Therefore it makes sense that there will be some differences between the two commodities’ prices, however usually the gap between the two was the other way around with Brent oil being cheaper than WTI oil.
This spread draws much attention mainly since this is uncharted water territory in the oil market, as I have mentioned before, such a gap never occurred in the past.
There are many analysts who quote figures and other indexes in order to use it to speculate on the further direction of the spread between Brent oil and WTI. I have addressed this issue in a previous post.
In order to understand these prices behavior, recall that this rise in the spread has only deepened in the last couple of months; therefore, we will need to examine the main changes during 2011 that might explain this spread. Remember that there is no clear answer here, and correlation doesn’t necessarily mean causation.
In the following graph are the daily changes of the spread between Brent oil and WTI (spot prices):
The graph shows that there were a couple of times in the past in which Brent oil peaked above WTI – one during May 2010 and one during September 2010.
If we to examine closely the changes during the last couple of months we could see that WTI and Brent parted in their trends during the end of January – maybe this could be related to the Egyptian coup, which started at the same time. More on that later.
In the final graph is the variance of the daily changes in the Brent to WTI spread in each month during 2010-2011.
One suggested reason is related to petroleum stocks as reported by the EIA: there was a an upward trend all through the month of January and February (up to date) in petroleum stocks; furthermore, the Cushing petroleum stocks inclined at the week ended Jan. 28 to the highest level since at least 2004, according to the Energy Department. There rises might partly explain the decline in WTI crude oil price. Another contributing factor is the current refinery input which is higher by roughly 5% compare to the same time last year. All these factors might contribute to the recent decline in WTI price.
Another suggested reason that many draw attention to, is the current turmoil in the Middle East, mainly in Egypt. Since Brent oil is considered more related to the uncertainty in the Middle East than WTI (geography wise), the Middle East riots might be responsible for driving Brent oil price up in the last couple of weeks (among other reasons). This explanation has has some merit yet it’s less valid compare to the former suggested reason since the coup in the Middle East started at the end of January and the wide spread between WTI and Brent started to pick up in January. According to the variance table above, however the fluctuations in the spread peaked during January and not February when the riots in Egypt had begun. Therefore, this reason might have some merit, but the data don’t entirely coincide with it.
There could be other reasons worth exploring affecting this spread such as the Brent oil stocks, the changes in demand for oil in the US compare to Europe and the changes in the EURO/USD exchange rate. As the month of February will progress it will be interesting to see if the gap between the two commodities will close or not.
For further reading (in this site):
- How not to speculate on the WTI and Brent oil spread
- Oil and gas prices outlook– 9 February
- Examining the Fed’s policy and its potential effect on oil prices