WTI: A Shadow Of Its Former Self

March 03, 2011

With Brent now trading at record levels compared to WTI, how can energy investors best take advantage of the widening spread?

 

Crude oil has surged in recent sessions, boosted by the crisis in Libya and unrest throughout the broader North Africa/Middle East region. Although these are unique developments to 2011, in many ways, the major themes bolstering the rally in crude oil are quite similar to those we saw a few years back, when the commodity first surpassed $100/barrel. Emerging markets like China and India are fueling demand growth, and supply concerns are stemming from volatile regions of the globe such as the Middle East, Africa, and the Gulf of Mexico. Replace Libya with Nigeria and the recent BP-Gulf of Mexico disaster with Hurricane Katrina or Ike, and you get the same story, just with different characters.

But while the situations stay the same, one thing that has changed over these past few years is the role of West Texas Intermediate (WTI) as the preeminent global crude oil benchmark—a role slowly undermined by increasingly wide spreads between WTI and other markers.

That's not to say WTI has moved in the opposite direction as other crudes; it is at 29-month-plus highs, as are other crude oils. Rather, WTI has meaningfully underperformed, causing the spread between it and something like Brent (the second most liquid crude oil benchmark) to widen to record levels.

Last month the WTI-Brent spread reached as high as $15.94:

 

WTI vs. Brent: 6/17/10 - 2/17/11

Source: Bloomberg

 

This is significant because, all else held equal, one would expect WTI and Brent to trade at similar levels. In fact, historically the higher-quality WTI has traded at a slight premium to Brent crude. But in recent years, this relationship has broken down intermittently, with these hitches increasing in frequency and duration:

 

WTI-Brent Differential

Source: Bloomberg

 

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