(ICIS - July 24, 2013) FocusUS refiners lose advantage of large Brent, WTI spread (by Al Greenwood)
HOUSTON (ICIS)--US refiners, mainly in the Midwest, have lost the advantage of the wide double-digit spread between Brent and West Texas Intermediate (WTI), which allowed them to benefit from large profit margins.
WTI prices were depressed because much of the oil was stranded in the interior of the US, away from refineries along the nation's coasts, said Phil Flynn, senior market analyst for the Price Futures Group.
That created a glut of oil supplies in the interior of the country, putting downward pressure on WTI prices. The lower prices benefitted Midwest refineries that could obtain the crude. But coastal refineries had limited access to the lower cost crude, limiting its benefits.
"What good did it do to the economy that you had cheap oil that you couldn't use?" Flynn asked.
New pipeline capacity is bringing that oil to refiners, giving them access to reliable and growing supplies of crude, made possible by the advent of shale oil and increased production from Canada.
Once oil from the interior reached the US coast, it started to re-align with global prices. Hence the decline in the spread, also known as the negative trans-Atlantic Brent/WTI arbitrage.
That arbitrage represented the price that coastal refiners have been paying for foreign crude.
As North American crude becomes more available, refiners should benefit from a more stable and reliable source of oil, Flynn said. "The risk premium of producing oil from the US on land will be dramatically less."
For example, US refiners are less exposed to buying oil from volatile parts of the world. In addition, their supply lines have shortened significantly, lessening the need to keep large inventories on hand.
Short-term, however, the narrow gap between Brent and WTI should squeeze refiners' margins, said Sandy Fielden, director of energy analytics at RBN Energy.
"Obviously, if refiners are paying higher prices for crude, unless products go up by a similar amount, their margins will be reduced," Fielden said. "In the short term, it is not good for refiners."
Brent and WTI had traded near parity until August 2010, according to RBN Energy. By November 2011, Brent was trading at a $28/bbl premium over WTI.
