Finance Weblog: The WTI-Brent spread - Instituto de Empresa Business School

WTI- Brent future option spread is trading at a 3 dollar discount, meaning that the front Brent future contract is $ 3 more expensive than it corresponding WTI contract. Generally WTI is a more expensive oil because of its gravity and sulfur content and the Brent contract trades at a discount over the WTI. In the last week since the Iran hostage crisis the Brent-WTI has widened breaching the three dollars. This width is large by historical standards and probably many investment firms have been caught in this widening. Mostly those doing convergence trades has seen how the spread widened and did not corrected from unusual deviations. Few reasons explain this divergence: a) the Brent is more affected to oil disruption from Iran; b) the congestion at Cushing in Oklahoma were the WTI is delivered ; c) the strike in the Fos-Lavera port.

Brent is the main reference price used by the Middle East region's exporters whereas WTI is the reference for US oil imports. Any conflict in the Middle East affects more Brent prices than WTI prices. Any Iran related issue is likely to induce higher increase in Brent derivatives rather that WTI derivatives.

Moreover the WTI –Brent spread is also influenced by the local US oil markets and specially the balance in Cushing, the main deliverable location for WTI. Even if there have been important oil draws in US inventories in the recent months and inventories are at historical lows, there is plenty of stored capacity in Cushing where WTI is deliverable. This is mainly due to insufficient pipeline capacity from this location to take the crude to refineries. Due to this fact, Cushing storage can be rapidly filled, depressing prompt WTI relative to other markets.

Last, if we look at the local European markets that rely heavily in Brent, oil trading has been affected by the strike in the Fos-Lavera port. The strike that extended for three weeks in the third biggest oil hub in the world near Marseilles was blocking 63 ships affecting more Brent than WTI.

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