WTI-Brent: WTI discounts widens again to over $20/barrel

One of the most significant developments in oil markets over the past three or so months has been a pronounced widening to historically high levels in the WTI Cushing discount to Brent. From the low point in 2012 of $10.3/barrel on 20 June the discount widened to a recent high on 11 October of $24.6/barrel.

This was the widest spread in a year and approaching the record of $29/barrel. For the third quarter the WTI discount averaged $17.6/barrel, significantly up from the $15.7/barrel and $15.5/barrel of the first and second quarters of 2012 respectively.

WTI has now been trading consistently at a discount to Brent for over two years, after having spent most of the previous 20 years at approximate parity or a small premium of up to two dollars or so. The recent widening in the WTI discount has occurred when some oil market observers had been predicting a marked narrowing. In principle, the widening reflects the widely differing market dynamics driving WTI and Brent. The former is tending to be depressed by burgeoning supplies related to sharply rising production in the US Mid-Continent and Texas plus Canada at a time of lacklustre demand. By contrast Brent is being supported by the acute supply problems in the North Sea and lingering Middle Eastern supply concerns. 

Effectively, due to the supply influx the inland US market has become more insulated from international influences than has been the case since perhaps the early 1970s. It is probably also fair to say that few oil industry observers predicted the strength of the upward trend in US production over the past few years. Indeed, until recently many were expecting declining production based on the peak oil theory. 

Having noted the above, the extent of the rapidly widening WTI discount in recent months is still a little surprising. Takeaway capacity in the form of pipelines and rail loading facilities from areas where production is growing rapidly and from the NYMEX pricing point of Cushing Oklahoma is being rapidly expanded, which theoretically should have alleviated some of the relative weakness in WTI by displacing imports in coastal zones.

We suggested a potential oil play in shorting the Brent oil contract and going long WTI in the latest edition of our magazine (see here, page 19 – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v10_generic) and stand by this trade, particularly into 2013.