search.noResults

search.searching

dataCollection.invalidEmail
note.createNoteMessage

search.noResults

search.searching

orderForm.title

orderForm.productCode
orderForm.description
orderForm.quantity
orderForm.itemPrice
orderForm.price
orderForm.totalPrice
orderForm.deliveryDetails.billingAddress
orderForm.deliveryDetails.deliveryAddress
orderForm.noItems
Chart 1: BRN / WTI spread (USD) USD


30 25 20 15 10 5 0


-5 -10


Chart 2: U.S. Field Daily Production of Crude Oil Source: Reuters


Thousand Barrels per Day


12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000


Source: EIA


The other important quality indicator is the API gravity which compares the crude’s density to water. Crude oils with high API gravity are referred as “light” while crude oils with low API gravity are considered “heavy”. Light crude is easier to refine hence generally trades at a premium to heavier crude.


WTI is slightly lighter and sweeter than Brent therefore - all other things being equal -it should be traded at a premium to Brent. However, there are a number of other factors to be taken into consideration to assess crude oil prices. As Brent/WTI is also a locational spread, both benchmarks may be subject to different geopolitical influences. During periods of international uncertainty - such as the US-Iran tensions – the price of Brent usually surges while WTI may be less impacted as it is based in landlocked areas. Brent prices are also heavily influenced by decisions taken by the OPEC such as production cuts or supply increase (Chart 1).


While WTI gets influenced by Brent’s trading price, it is still largely dependent on the U.S. supply and demand. On the supply side, a decline in U.S. Rig counts, a natural disaster such as hurricanes or an unexpected drop of U.S. crude oil inventories are likely to send WTI price higher.


WTI IS USED AS REGIONAL BENCHMARK FOR NORTH AMERICA WHILE BRENT – WHICH IS EASIER AND CHEAPER TO TRANSPORT TO DISTANT LOCATIONS – IS CONSIDERED AS A GLOBAL BENCHMARK.


Annual Average


Historically, the two crude oils traded very closely although Brent was generally traded a few dollars below WTI to reflect the delivery cost for shipping Brent crude to the U.S. market. However, in 2011 the Brent/WTI spread started to get wider. The principal reason of the price divergence between the two benchmarks was the rise of the U.S. crude oil production driven by the surge of the North American shale oil production.


Shale oil dramatically changed the U.S. crude oil market but the transformation was so rapid that it created a supply glut as Cushing, Oklahoma did not have enough pipeline capacity to cope with the sharp production rise. Another factor that amplified the supply glut at that time was the inability of U.S. refineries to process such a large volume of light sweet crude oil. Before the beginning of the U.S. shale revolution, refineries in the Gulf Coast region were mostly processing heavier crude oil imported from Canada and South America. The combination of the above events pushed the Brent/WTI spread above $25 during the second half of 2011. (Chart 2).


In 2014, the spread started to narrow as additional pipeline capacity around Cushing relieved the surge of oil inventories in the region, allowing U.S. crude oil to flow more easily to refineries located in the Gulf Coast. In addition, other pipelines as well as new rail projects were built to allow the transport of U.S. crude oil from production areas to refineries without passing through Cushing. This period coincides firstly with the lifting of the U.S. crude oil export ban which increased exportations and international demand for U.S. crude oil and finally with a worldwide oil glut putting downward pressure on the price of Brent. This led to the Brent/WTI to trade a few times below $0 between December 2015 and May 2016.


Since that period, Brent has been continuously trading at a premium to WTI supported by the US- Iran crisis, OPEC production cuts, as well as the U.S. crude oil production boom. During the first half of 2019, the spread traded between +$6 and +$11.


Mickael Soussant E: mickael.soussant@admisi.com T: +44(0) 20 7716 8073


Another factor to take into consideration is how strong the U.S. dollar is against other currencies. Generally, we observe an inverse relationship between crude oil and the U.S. dollar. As crude oils are priced in U.S. dollars, it would be more expensive to buy crude oil for a country like China when the U.S. dollar is strong. Therefore a strengthening U.S. dollar tends to lower global demand for crude oil which in turn drives prices down.


7 | ADMISI - The Ghost In The Machine | July/August 2019


1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


24/06/1988 24/06/1990 24/06/1992 24/06/1994 24/06/1996 24/06/1998 24/06/2000 24/06/2002 24/06/2004 24/06/2006 24/06/2008 24/06/2010 24/06/2012 24/06/2014 24/06/2016 24/06/2018


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28