Brent-WTI Spread Widens as the Price Of Oil Corrects

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January 21, 2020 9:30am ETF BASIC NEWS

ETF BASIC NEWS | News, Ratings, and Charts

  • Oil drops as the US-Iran hostilities de-escalate
  • The Brent premium rises while the price falls
  • A location, quality, and political risk spread

Volatility in the crude oil futures arena increased significantly over the first days of 2020. The attack that killed the leader of Iran’s revolutionary guard increased the political temperature in the Middle East. The region is home to more than half the world’s crude oil reserves. The price of oil had been slowly rising since trading to a low of just over $50 per barrel on the nearby NYMEX WTI futures contract and just above $56 on the nearby ICE Brent futures contract in early October.

Both crude oil benchmarks reached a peak on January 8 as Iran retaliated with a missile attack on Iraqi airbases that house US troops. NYMEX futures rose to a peak of $65.65, just 95 cents below the 2019 high. Brent futures hit $71.99 per barrel, which was below the high of $75.59 per barrel last year.

The United States Oil Fund (USO) and United States Brent Oil Fund (BNO) track the price action in the nearby futures contracts that trade on the NYMEX and Intercontinental Exchange. Both oil benchmarks have been falling since the January 8 high, but Brent has outperformed the WTI futures.

 

Oil drops as the US-Iran hostilities de-escalate

On January 8, the price of nearby NYMEX WTI futures and Brent futures that trade on the Intercontinental Exchange put in bearish reversal trading patterns.

 

 

(Source: CQG)

The daily chart of February NYMEX futures illustrates the price rose to a peak of $65.65 on January 8, which was the highest price since April and within 95 cents of the 2019 high. On the same day, the price reversed course and closed below $62.11, the previous day’s low. Since then, February futures have traded to a low of $57.42 on January 15, 12.5% below the January 8 high.  

(Source: CQG)

At the same time, March Brent futures put in the same bearish formation. After rising to a high of $71.99 per barrel on January 8, the price closed below the prior day’s low of $67.65. The price dropped to a low of $63.55 on January 15, 11.7% below the high as Brent fell less than WTI on a percentage basis.

After the missile attack from Iran, and the tragic downing of a commercial airliner, the situation between the US and Iran de-escalated, at least temporarily. Nearby February NYMEX crude oil futures settled at $58.54 last Friday with the March ICE Brent futures at $64.85 per barrel.

 

The Brent premium rises while the price falls

The daily chart of the price of March Brent futures minus March NYMEX futures shows that the Brent premium over WTI has moved steadily higher since mid-November.

(Source: CQG)

The chart highlights the decline from a $3.92 premium for Brent over WTI to a $6.70 premium on January 8 was primarily because of the hostilities between the US and Iran. At the end of last week, Brent was trading at $6.28 per barrel over WTI on the March futures contracts.

 

A location, quality, and political risk spread

The Brent versus WTI spread reflects location, grade, and politics. When it comes to location, the price for Brent North Sea crude oil is the benchmark for European, African, and Middle Eastern petroleum. West Texas Intermediate is the pricing mechanism for US crude oil.

Brent has a higher sulfur content than WTI, which makes it the superior grade of crude oil for refining into distillate products. Since WTI is lighter and sweeter, which means it contains less sulfur, it is more appropriate for processing into gasoline.

The political risk component is because the Middle East is home to over half the world’s petroleum reserves. Brent tends to outperform WTI when supply concerns rise in the world’s most turbulent political region.

In mid-September, the drone attack on Saudi oil fields caused the nearby spread to rise to a $7.41 premium for Brent futures.

The price of crude oil has corrected in the aftermath of January 8. At $6.28 per barrel at the end of last week, the spread continues to be at an elevated level, which reflects a continuation of supply concerns. Keep an eye on the Brent-WTI spread when trading or investing in the oil patch.

 


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