US Recovery Fuels Tight Brent-WTI Spread

As the oil demand recovery in North America outpaces the rest of the world, the differential between global benchmark Brent and its US counterpart West Texas Intermediate (WTI) has thinned dramatically. Currently, Brent for August delivery on London’s ICE trades just $1.66 higher than Nymex WTI futures for the same month. The spread between Brent and WTI priced at Midland and Houston is even narrower. Experts say the tight spread indicates rising demand juxtaposed with lagging supply growth in the US. “The tight WTI-Brent differential is ... consistent with our view that North America is driving the current deficit, as local demand rebounds in the face of inelastic local supply,” noted commodity analysts with investment bank Goldman Sachs. A narrow Brent-WTI differential hampers US crude exports, as the spread must be wide enough to offset the cost of shipping in order to justify the economics. The current compressed spread could also attract more foreign oil to the world’s largest economy, keeping the US a net importer into the second half of the year (OD Jun.11'21). Downstream Speeds Up Demand is recovering in the US following an aggressive vaccine rollout and the massive stimulus package delivered earlier this year. Consumption is also on the rise in some key export markets for the US downstream (OD Jun.25'21). In response, refiners in the country have started opening the throttle; data from the US Energy Information Administration (EIA) show domestic utilization at 92.9% the week ended Jun. 25, up from 75.5% a year ago. As refiners raise throughputs, they are buying more crude. Much of that has been domestic or Canadian -- EIA data show the domestic downstream ran a slate of over 75% North American crude during the first quarter, for example, and imports of light, sweet grades such as those produced in shale plays like the Permian Basin are negligible. Refinery throughputs are up over 2 million b/d year on year. Cruise Control But the upstream’s response has been slow. Producers are remaining disciplined, keeping a lid on output even amid a massive oil price rally (OD Jun.28'21). US crude production is currently some 11.1 million barrels per day, up just 100,000 b/d from the same period last year and well below 2019’s annual average of 12.2 million b/d (related). This dynamic is supportive for WTI relative to crude produced elsewhere. Inventories of crude in the US are 452.3 million bbl, some 15.2% below year-ago levels (related). At the Nymex pricing point of Cushing, Oklahoma, inventories are 5.3 million bbl lower than last year at 40.3 million bbl. “Stockpiles are already at multiyear lows and below seasonally normal levels of 50 million bbl,” noted Mike Tran of RBC Capital Markets. And they could fall farther, with Tran saying some market players anticipate levels below 30 million bbl. Frans Koster, New York