Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Could WTI Trade at a Premium to Brent By Next
By Nick Cunningham
Oil Price, Al-Jazeerah, CCUN, August
A flood of bearish news has pushed down oil prices to their lowest levels
in months, with WTI nearing $45 per barrel and Brent flirting with sub-$50
With a bear market back, there is
pessimism throughout the oil markets. Goldman Sachs is even predicting
oil stays at $50 through 2020, a profoundly grim view of the state of oil
On the other hand, the contraction in U.S. shale is
underway, so it is just a matter of time before the mismatch between supply
and demand balances out.
For several years, WTI, which tracks U.S.
crude, has traded at a discount to the more internationally-oriented Brent
crude marker. There were a few reasons for this. The U.S. saw a surge in oil
production, a familiar story to anyone watching the energy space over the
past few years. Importantly, however, was the fact that pipeline capacity
could not keep up with production, causing localized gluts in certain areas
of the United States. Also, the ban on oil exports kept oil stuck within
U.S. borders. That also contributed to a lot of oil sloshing around in the
As a result, the gap between WTI and Brent opened up after
historically trading in concert. WTI started selling for a few dollars
cheaper per barrel, a discount that was most pronounced in 2012 and 2013.
The spread has continued to wax and wane, narrowing more recently because of
a build out in pipeline capacity in the U.S.
However, the WTI/Brent
spread has shrunk more dramatically since the collapse in oil prices. That
is simply due to the fact that global oil markets started experiencing a
glut of supply across the world in 2014, a development no longer confined to
the United States. WTI even
briefly traded higher than Brent earlier this year, before the discount
Low oil prices will sooner or later force a cutback in production.
Although EIA data is sketchy on this point, there is evidence that a
contraction is already occurring. The weekly EIA figures are estimates,
subject to inaccuracies. A retrospective look a few months later usually
clarifies the data. However, even taking the most optimistic view of the
data, U.S. oil production has flattened out at a minimum.
data shows that output likely peaked in March at 9.69 million barrels
per day, falling to 9.51 million barrels per day in May (the latest month
for which data is available).
In other words, low oil prices are
forcing production cut backs. More declines in output should be expected in
the months ahead. Moody's expects more defaults in the oil and gas industry
this year, as debt piles up and lenders cut off access to credit for
drillers. "We expect that the energy sector will continue to be a primary
driver of defaults over the next year," Moody's senior vice president, John
Puchalla, said in a
statement. Hedges are expiring, which have shielded profits up until
now. Credit lines could be reduced, forcing liquidity crises for weaker
companies. These developments could impact oil production overall.
As a result, slowly and incrementally, U.S. oil production could decline
enough to start to put a floor beneath oil prices.
however, with non-market oil producers controlling a large portion of oil
capacity around the world, the contraction of supply could
disproportionately occur in the United States. Put another way, OPEC will
continue to produce even though oil prices are low, but market actors in the
U.S. won't be able to do the same. New Iranian oil will only magnify these
The result could be not only a narrowing of the
WTI/Brent spread, but we may actually see WTI overtake Brent. That is the
conclusion of a recent report from Bank of America, which predicts that
WTI will trade at a premium to Brent in the spring of 2016. According
Francisco Blanch, Bank of America's head of commodities in New York, the
U.S. may resort to more oil imports, as oil from abroad suddenly becomes
cheaper. "This combination of higher output from Persian Gulf producers and
declining drilling activity in North America could well reverse WTI-Brent
crude oil market dynamics next year," Blanch concluded in the report.
Share this article with your facebook friends