Continued from Part 3: Why propane prices led natural gas liquids price gains
WTI and Brent used to trade in line, but prices had diverged over the past few years
The spread between West Texas Intermediate (WTI) and Brent crude represents the difference between two crude benchmarks, with WTI more representing the price U.S. oil producers receive and Brent more representing the prices received internationally. The two crude oils are of similar quality and theoretically should price very closely to each other. However, the prices had differed greatly between the two crudes because a recent surge in production in the United States has caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is priced. This created a supply and demand imbalance at the hub, causing WTI to trade lower than Brent. Before this increase in U.S. oil production, the two crudes had historically traded in line with each other.
The above graph shows the WTI-Brent spread over the past few years. Note that when the spread moves wider, it generally means crude producers based in the United States receive relatively less money for their oil production compared to their counterparts that are producing internationally.
The EIA recently revised its prediction for 2014′s average WTI-Brent spread
The U.S. Energy Information Association in its latest “Short Term Energy Outlook” report revised its expectation for the average discount of WTI to Brent to ~$12 per barrel, from ~$9 per barrel. The revised forecast takes into account increasing uncertainty for existing refinery infrastructure to process an increase in supply of light sweet crude production in North America, pushing WTI prices down relative to Brent.
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