WTI and Brent oil price spreads narrowed

In the past three weeks, international oil prices have shown a relatively strong upward momentum
.
On June 8, WTI and Brent prices rose to $122.
11/b and $123.
58/b, respectively, reaching their highest levels
since March 9.
At the same time, the spread between the two (Brent minus WTI oil prices) has narrowed, stabilizing near
$1/barrel since June 1.
In particular, the spread was -$0.
47/b on May 17, the first time since May 29, 2020 that Brent was below the WTI, with negative spreads continuing until May 20
.

"It's normal for Brent and WTI to have a price difference," Dong Xiucheng, executive director of the China International Carbon Neutral Economic Research Institute and executive director of the International Business Strategy Institute of the University of International Business and Economics, told reporters, "On the one hand, there is a difference in the quality of Brent crude oil and WTI crude oil, although they are both light sweet crude oil, but WTI crude oil is lighter and has lower
sulfur content than Brent crude oil.
" 。 On the other hand, although Brent and WTI are both international crude oil price benchmarks, but there are still certain regional characteristics, WTI oil prices are mainly used in North America, more affected by the supply and demand situation in the region, Brent oil prices are used in most other parts of the world, more reflective of the global (especially European) oil market
.
”

According to the research of Huo Lijun, an economist at the China Petroleum Institute of Economics and Technology, the history of the change of Brent and WTI price difference is very complicated, sometimes WTI price is higher than Brent, sometimes Brent price is higher than WTI, the difference between the two sometimes widens and sometimes narrows, but overall can be divided into three major stages
.
The first stage was before the outbreak of the US shale oil revolution (2009), WTI oil prices were longer higher than Brent, and the spread fluctuated in the range of -2 to -1 US dollars / barrel most of the time, basically reflecting the quality difference
between the two.
From 1989 to 2008, the spread averaged -$1.
4/barrel
.
Among them, only in 2007 the spread was 0.
3 US dollars / barrel, that is, the average annual oil price of WTI was lower than that of Brent; The rest of the year was negative, with a low of -$3.
4/b
in 2004.

The second stage is after the outbreak of the shale oil revolution and before the lifting of the ban on US crude oil exports in 2015, WTI was significantly discounted to Brent, and the spread was as high as $28 per barrel
.
After a technical breakthrough in shale oil extraction, the downward trend of U.
S.
crude oil production was reversed in 2009, and the Brent and WTI spread also turned from negative to positive and widened
.

The shale oil revolution has caused U.
S.
light sweet crude oil production to soar, while U.
S.
refineries mainly process medium and heavy crude oil, and the U.
S.
crude oil export ban has restricted crude oil exports, so the pressure of oversupply of U.
S.
light sweet crude oil is increasing
.
At the same time, pipeline capacity constraints further suppress WTI oil prices
.
As crude oil pipeline capacity cannot keep up with the pace of production growth, crude oil in Cushing, where WTI crude oil futures are delivered, has accumulated significantly, and the regional market characteristics of WTI oil prices have become more and more obvious
.
On October 14, 2011, the Brent-WTI spread reached an all-time high of $27.
88/barrel
.
From 2011 to 2012, the average price difference between the two was as high as 16.
8 US dollars / barrel
.

However, since 2013, with the improvement of pipeline capacity in the United States and the relaxation of crude oil export policies, the oversupply and accumulation of regional supply in the United States have eased, and WTI oil prices have significantly narrowed compared with Brent discounts, and the spread has narrowed to $4.
8/barrel
in 2015.

The third stage is from 2016 to the present, the spread between Brent and WTI has generally narrowed, and in recent years it has fluctuated
around the hub of 3-4 US dollars / barrel.
With the rapid rise in U.
S.
domestic crude oil production, the ban on U.
S.
crude oil exports was officially lifted at the end of 2015, and U.
S.
crude oil exports increased significantly
.
Since then, important obstacles to suppressing WTI oil prices have been removed, and the spread between Brent and WTI has narrowed
.
In 2016, WTI fell to $1.
7/b
compared to Brent.
However, from 2018 to 2019, due to the capacity of pipelines from the Permian Basin to the US Gulf of Mexico, WTI oil prices were under pressure, and in 2019, the spread between the two rose to $7.
1 per barrel
.
Since the second half of 2019, with the gradual lifting of the bottleneck of pipeline transportation in the Permian Basin, the spread has narrowed again, and since then it has generally fluctuated
around 3-4 US dollars / barrel.
From 2016 to 2021, the spread averaged $4.
4/barrel
.

Since 2022, the spread between Brent and WTI has generally widened and then narrowed, especially after hitting a high of $7.
63/barrel at the end of March, showing a continuous narrowing trend
.
Dong Xiucheng said that compared with the United States, geopolitical conflicts have a more significant impact on European crude oil supply, and Brent is mainly used as the benchmark price of crude oil in Europe, and it is naturally more sensitive to conflicts, so the spread between Brent and WTI has widened
significantly.

Huo Lijun believes that the recent narrowing or even reversal of the price spread is mainly caused by the intensification of the tension between oil supply and demand in the United States, and is the result of
the comprehensive impact of factors such as increased oil demand, increased exports, low inventories, and slow production growth in the United States.

On the demand side, with the peak of summer driving trips in the United States at the end of May, refined oil consumption was driven by domestic oil demand
.
After the geopolitical conflict, US oil exports to Europe increased
significantly.
U.
S.
producers exported 48.
8 million barrels of crude oil to Europe from major terminals in Texas and Louisiana in April, the highest monthly record
since the U.
S.
lifting the ban on crude exports, according to ship tracking data.

On the supply side, U.
S.
domestic crude oil production grew more slowly, stabilizing at 11.
9 million b/d
from May 9 to June 3, according to the U.
S.
Energy Information Administration (EIA).
In terms of inventories, EIA reported that U.
S.
commercial crude inventories recorded 417 million barrels in the week of June 3, about 3% below the five-year average, and the Strategic Petroleum Reserve recorded a decline
for the 39th consecutive week.
In addition, the decline in gasoline inventories in the United States and the continued rise in prices partly reflect the tight supply of oil in the region, which in turn supports WTI oil prices
.
U.
S.
gasoline inventories fell 800,000 barrels month-on-month in the week of June 3, about 10 percent
below the five-year average.
According to data released by the US car price tracking website GasBuddy, the average price of gasoline in the United States has risen rapidly recently, exceeding $5 per gallon on June 9, once again refreshing a record high, and there is little hope that prices will fall in the short term
.

Looking forward to the future trend of the spread, Dong Xiucheng believes that although the spread sometimes widens, sometimes narrows, and even reverses, Brent higher than WTI will still be the norm, because the US oil supply is basically no problem, and Europe is facing greater uncertainty
due to heavy dependence on imports and geopolitical conflicts.
Huo Lijun said that WTI oil prices are expected to remain relatively strong during the year
.
The European Union imposed an embargo on Russian oil, and US crude oil and oil exports will remain strong in the later period, boosting WTI oil prices
.
The difficulty of a significant recovery in US commercial crude oil inventories, especially in the Cushing region, will also provide important support
for WTI oil prices.