WTI-Brent Spread Narrows as U.S. Production Changes the Game
- U.S. exports more than 2 million barrels daily crude oil
- Production could meet 11.18 million barrels daily in 2019
- Tighter spread reflects globalization of American crudes
- Natural gas storage could end season 18% below 5-year average low
The Matrix
Factors that determine relative prices of American and Brent crude oils have been adjusting to the new reality of the United States as a significant supplier to global markets.
The United States continues to expand production of crude oil. The EIA supply/demand balance for the week ending March 2 reported production of 10.369 million barrels daily, a weekly record. Forward projections bring output to 10.59 million barrels per day in 2018 and 11.18 million barrels daily in 2019.
The expansion of output might be expected to put downward pressure on prices. In fact, since February, 2016, WTI prices have moved higher with few bearish periods. WTI bottomed at $26.05 at that time. Prices moved to $51.67 in June and remained in a range until October, 2017 when prices broke to the upside. Values topped at $66.66 in January, 2018. They have since traded in a range with no clear indication of trend. (Fans of Elliott Wave might see two bullish impulse waves and a correction with an upside objective at $72.00.)
WTI Crude Futures: Weekly Prices June 2014 – March 2018 Source: CME
The price relationship between WTI and Brent might be expected to draw closer as American crudes complete in global markets. This did not happen in 2017. WTI prices lost ground to global Brent. This reflected curtailed output by OPEC members and strong global demand.
The relationship has reversed in 2018. WTI crude oil lagged Brent by $7.35 in December, 2017. At writing, WTI has moved closer to Brent, trading now around $3.33. As Powerhouse has discussed, exports have grown at an expanded pace. On February 16, more than two million barrels of crude oil were sent out daily.
WTI minus Brent Crude Futures: Weekly Prices 2016 – March 2018 Source: CME
Supply/Demand Balances
Supply/demand data in the United States for the week ending March 2, 2018 were released by the Energy Information Administration.
Total commercial stocks of petroleum were unchanged during the week ending March 2, 2018.
There were draws in stocks of gasoline, K-jet fuel, distillates, and propane. Builds were reported in stocks of, fuel ethanol, residual fuel and other oils.
Commercial crude oil supplies in the United States increased to 425.9 million barrels, a build of 2.4 million barrels.
Crude oil supplies increased 0.8 million barrels in PADD 2 (Midwest), PADD 3 (Gulf Coast) crude stocks rose 2.6 million barrels, and PADD 4 (Rockies) advanced 0.3 million barrels. PAD District 1 (East Coast) decreased 0.5 million barrels and PADD 5 (West Coast) stocks declined 0.7 million.
Cushing, Oklahoma inventories decreased 0.6 million barrels from the previous report week to 28.2 million barrels.
Domestic crude oil production increased 86,000 barrels daily to 10.369 million barrels per day from the previous report week.
Crude oil imports averaged 8.003 million barrels per day, a daily increase of 721,000 barrels. Exports rose 53,000 barrels daily to 1.498 million barrels per day.
Refineries used 88.0 per cent of capacity, an increase of 0.2 percentage points from the previous report week.
Crude oil inputs to refineries increased 53,000 barrels daily; there were 15.935 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 32,000 barrels daily to 16.283 million barrels daily.
Total petroleum product inventories saw an decrease of 2.4 million barrels from the previous report week.
Gasoline stocks decreased 0.8 million barrels from the previous report week; total stocks are 251.0 million barrels.
Demand for gasoline increased 417,000 barrels per day to 9.276 million barrels daily.
Total product demand increased 598,000 barrels daily to 20.470 million barrels per day.
Distillate fuel oil supply fell 0.6 million barrels from the previous report week to 137.4 million barrels. National distillate demand was reported at 3.926 million barrels per day during the report week. This was a weekly increase of 5,000 barrels daily.
Propane stocks decreased 1.6 million barrels from the previous report week to 41.1 million barrels. Current demand is estimated at 1.622 million barrels per day, an increase of 571,000 barrels daily from the previous report week.
Natural Gas
According to the Energy Information Administration:
Working gas net withdrawals are 72 Bcf lower than the five-year average. Net withdrawals from storage totaled 57 Bcf for the week ending March 2, compared with the five-year (2013–17) average net withdrawal of 129 Bcf and last year’s net withdrawals of 57 Bcf during the same week. Working gas stocks totaled 1,625 Bcf, which is 300 Bcf less than the five-year average and 680 Bcf less than last year at this time. Working gas stocks in all regions in the Lower 48 states are lower than year-ago levels.
Working gas levels are 484 Bcf higher than the five-year minimum. Working gas stocks have rebounded since falling 59 Bcf lower than the five-year minimum range and 486 Bcf lower than the five-year average for the Lower 48 states on January 19, 2018. If net withdrawals from working gas stocks match the five-year average for the remainder of the withdrawal season, working gas stocks will total 1,402 Bcf by March 31, 2018, which is 18% lower than the five-year average. Working gas stocks ended the 2013–14 heating season at 837 Bcf, which is the lowest-reported level for that time.
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