Why Investors Should Pay Close Attention To The Disappearing WTI-Brent Spread

The average investor might not think much about the oil price spread between West Texas Intermediate (WTI) and Brent Crude, which is usually only a couple of dollars per barrel--but the difference is actually vital, and one that every would-be oil investor needs to understand.

To be fair, the price of WTI should be higher than that of Brent, considering its sweeter and lighter quality. After all, WTI has an API gravity of 39.6 degrees and a sulfur content of 0.24%, while Brent has an API gravity of around 38 degrees and a sulfur content of somewhere around 0.40%. The lower the density, the easier it is for it to be refined into gasoline or diesel fuel. Conversely, the higher the density, or "heavier," the oil is, the harder it is to refine.

However, since 2013, Brent has been the more expensive crude blend thanks to its status as the global oil benchmark and a better indicator of global oil prices. That is the case because Brent essentially draws its oil from more than a dozen oil fields located in the North Sea, while WTI is sourced from U.S. oil fields, including the pivotal Cushing Oil Field. According to ICE Futures, ~60% of the world's traded oil is priced off of Brent.

But the crude hierarchy was upset for a brief moment a few days ago after WTI stole Brent's crown as the more expensive oil.

On Tuesday, WTI price crossed Brent to trade at $115.4/bbl vs. 115.2/bbl, an anomaly that the experts are saying is an indication of how the market has been scrambled by the pandemic and the war in Ukraine ahead of the busy summer driving season.

"This is a significant development in my opinion," Jeffrey Halley, a senior market analyst at Oanda, told clients on Tuesday.

Brent's hegemony has, however, been restored, with Brent trading at $107.2 vs. $106.5 for WTI in Thursday's intraday session.

Russian oil embargo

According to Halley, WTI has lately been gaining prominence thanks to Europe's move to impose a formal embargo on oil from Russia, which is pushing countries in the bloc to race to secure supplies from other markets. At the same time, U.S. refiners are trying to ramp up activity to meet demand, which is also squeezing WTI higher.

U.S. Treasury Secretary Janet Yellen said on Tuesday that the European Union could combine import tariffs on Russian oil with the phased oil embargo it is trying to put in place to shrink Russia's energy revenues. The tariffs plan aims to keep more Russian oil in the global market in a bid to limit price spikes spurred by a full embargo while limiting the amount of money Russia can earn from exports. The Treasury officials said because Russian oil sells at a discount to global benchmark crudes, a tariff could be set at a level that would both capture part of that gap and reduce Russia's profits.

Currently, Europe receives about 2.2 million barrels per day (bpd), or half of Russia's total crude oil and petroleum product exports and 1.2 million bpd of petroleum products.

Yellen says that she's supportive of any plan the 27-member EU could agree on, but "it is critically important that they reduce their dependence on Russian oil." She has also pledged that the U.S. will help to meet the bloc's energy needs, including working to increase global supplies of oil and gas.

By Alex Kimani for Oilprice.com