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Opinion: Could WTI Trade At A Premium To Brent By Next Year?

by Nick Cunningham of

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 territory. 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 supplies.

On the other hand, the contraction in US 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 US crude, has traded at a discount to the more internationally-oriented Brent crude marker. There were a few reasons for this. The US 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 US borders. That also contributed to a lot of oil sloshing around in the US

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 US

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 returned.


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, US oil production has flattened out at a minimum.


More accurate monthly 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, US oil production could decline enough to start to put a floor beneath oil prices.

Interestingly, 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 US won’t be able to do the same. New Iranian oil will only magnify these differences.

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 US 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.

Nick Cunningham is a Washington DC-based writer on energy and environmental issues.




The frackers may go bust, or just stop drilling new wells, but the technology cannot be uninvented. They will only keep getting better at it and this will put a ceiling on the price for a few years. If they go bust, someone else will buy the rights and re-employ the former owners who will become employees rather than owners.
The knowledge will persist until the oil runs out or fracking s banned.
Also, with the move to higher efficiency cars and the gen Y'ers not being so fussed about cars, we can expect demand to flatten of not reduce (in the USA + Europe anyway).

Longer term, developing economies will take up the slack as everyone in India and China wants their own space in a traffic jam. (which won't be solved by electric cars).


Im still trying like mad to consume few gas but I can't say the same of other drivers that own big suvs and drive fast. They are the ones pushing gas price higher. If everyone was like me gas price will be 80 cents a gallon because I have a small car and I drive it slow. Also in winter I heat my home just a little and when I go out I cut heating to 8 celcius. I never fill up my tank to maximum to cut weight except if I find a bargain price for my gas somewhere.

Im fooling around in this website to hope in find a cure
To the high cost of energy. I like cars but I hate putting gas in it so I choosed a small cheap car. If gas was cheap I had choosed a roll Royce or maybe a dodge viper but face it you will lose money with gas so try to invent the thorium limousine with 8 seats.


@Gor, you have posed an important question: should you personally try to reduce fuel consumption, knowing that it is the right thing to do, but that this individual act will alone have little impact, or just give up and drive whatever you like.

As you say: "If everyone was like me gas price will be 80 cents" and this is probably true, but they aren't, so the gas price is higher (or was higher).

I don't think you will find a cure on this website, but you will find information and discussion of the issues.

The nearest thing to a "thorium limousine" would be a Nissan Leaf or Tesla S, driven in France from Nuclear electricity.
If you really wanted to, and lived in a sunny place and had the space, you could charge your Leaf from your own PV panels.

p.s. I would just fill the tank every time, I wouldn't worry about the extra weight of a full tank. Just make sure the tires are well pumped up.


Gor: The majority of people who consume highly have been brainwashed to believe that high consumption is their patriotic duty. They have no rational thoughts in their heads. Your act of reducing consumption is a benefit to the world, but to yourself too. Not simply just a financial benefit but also a psychological one. How depressed would you be if you acted as foolishly as the majority of vacuous followers of a frivolous life? Obviously that cannot happen because you have cognitive reasoning, but imagine if you didn't? Wouldn't you feel shame for your acts of stupidity?

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