(News Bulletin 247) – Since the beginning of the 2010s, the price of a barrel of Brent has been higher than that of WTI, whereas this was not the case previously. Recent tensions on stocks in the United States, however, temporarily reduced the gap two weeks ago. To the point of seeing WTI come back in front?

When we talk about oil prices, we often cite two crude contracts: North Sea Brent, listed in London, and West Texas Intermediate (WTI) from New York. But there are plenty of others. “Virtually every producing country has its own blend of crude that it markets, from Western Canadian Select to Arab Extra Light from Saudi Arabia,” explains the Mansfield firm.

“We often talk about oil, but oil in a monolithic way does not exist, there are more than 160 references in the world even if the most important remains Brent because it serves as an anchor for many other contracts oil companies”, explains Benjamin Louvet, head of raw materials management at OFI Invest Asset Management and co-author of the book “Metaux, the new black gold”

which has just been published.

The prices of the different types of oil produced and quoted vary according to several parameters, notably – to simplify – their “quality”. On this point, Brent and WTI are both well off. However, American oil fundamentally has better characteristics than its European counterpart. While it is now less expensive.

This is not always the case. “Historically, WTI (or West Texas Intermediate) was more expensive and more sought after than Brent because of its good quality, which depends on the density, measured by what is called the API rate, and the content in sulphide. For refiners, WTI thus made it possible to have a good ‘product mix’, and thus produce diesel, gasoline or other petroleum-derived products”, recalls Benjamin Louvet.

Shale oil changed everything

The turning point took place between 2010 and 2011, a period from which WTI really began to decline in relation to Brent. This period corresponds to the boom in shale oil in North America.

“Brent was once cheaper than WTI, but the situation has changed with the emergence of the shale industry. WTI produces more gasoline than Brent and the stagnation of demand for this fuel also makes it relatively cheaper,” underlines Tamas Varga of PVM Energy. “Geopolitical tensions support Brent more than WTI. Finally, with the lifting of the ban on exporting crude oil to the United States (in 2015, Editor’s note), shipping costs must be taken into account to make competitive American crude,” he adds.

“In 2015, a ban that prevented exports of unrefined oil was lifted. This therefore allows crude oil to be exported to major oil consumers, such as China, but with a higher transport cost than Brent, which comes from Europe”, explains Benjamin Louvet.

The OFI Invest Asset Management expert details the impact that shale oil has had on WTI. “The arrival of shale oil in North America completely changed the oil landscape and pushed WTI downward. At first, refiners were satisfied with this type of oil, which was very light, because they could mix with heavier oils, notably those from Venezuela to obtain medium oil”, he recalls.

“But as shale oil production has increased, it has driven down the API density of WTI and U.S. oil, making it less desirable, and prompting refiners and market operators to turn more to Brent”, continues Benjamin Louvet. “The American embargo on Venezuelan oil has also complicated the blending carried out by refiners with shale oil,” he also notes.

Falling stocks

However, the gap between the two contracts can occasionally vary and narrow significantly. Two weeks ago the “spread”, that is to say the price difference on the two futures contracts, fell below 1 dollar per barrel, leading observers to wonder if New York oil could not go back above that of London.

“The gap is currently narrowing (as of two weeks ago, editor’s note) because inventories at the crucial crude oil center of Cushing, Oklahoma (right in the center of the United States, editor’s note), are historically low, and with constraints “From the Saudi/Russian supply, the demand for American crude oil is increasing. In addition, American shale oil production is reaching its peak and fund managers are creating healthy financial demand for WTI,” explains Tamas Varga.

The main factor nevertheless remains the evolution of crude stocks in the United States. “Stocks in Cushing, the “capital” of American oil, have returned to historically very low levels,” adds Benjamin Louvet.

“These stocks are not very far from being at inoperative levels for the American reference terminal at Cushing. For technical reasons, in a tank, the oil pumping pipe is not at the bottom of the tank but at the bottom of the tank. a certain height. If stocks are too low, the oil reserve passes to the bottom of the pipe. There are therefore concerns about supply difficulties,” he explains.

Market deficit

This adds to a tense oil market due to production cuts that Saudi Arabia and Russia have extended until the end of the year. These declines will create a supply-side deficit for the fourth quarter, a shortage that the International Energy Agency and the Organization of the Petroleum Exporting Countries (OPEC) recently warned about. The bank UBS had previously estimated this deficit at more than 1.5 million barrels per day for the fourth quarter. But OPEC estimates it at 3 million barrels per day.

“Currently the deficit between oil supply and demand is around 1.5 to 2 million barrels per day,” assesses Benjamin Louvet.

A Brent-WTI arbitrage

Can Brent now fall back below WTI, and if so sustainably? For Tamas Varga, this last scenario (WTI sustainably more expensive than Brent) is “unlikely” due to the more expensive delivery costs for WTI.

“It is possible (that WTI exceeds Brent at one point, editor’s note) if WTI stocks continue to fall and start to run out, but the gap would not be considerable and the crisis could be temporary”, responds from his Benjamin Louvet side.

“The market will always make an arbitrage between the price of the barrel but also the cost of transport to major consumers, like China, who are weaker for Brent, since it is simpler to transport oil from Europe to the China than from the United States,” he continues.

“As for whether WTI can sustainably return to Brent, it will depend on one factor: the development of shale oil production. It has long been thought that production would increase until 2028, but several signs point to to think that the peak could be reached at the end of 2024. Which would obviously weigh on supply and exert upward pressure on WTI”, explains the expert.

“Last year the productivity (production per well) of shale oil fell for the first time. This raises the question of the availability of good quality wells to continue to increase refiners’ production. The number of drillings in activity has declined. For years, there were “drilled but uncompleted wells”, that is to say wells drilled but where the rock was not fractured. Now, there is a risk of there being fewer of them, which could force producers to redo wells from A to Z,” explains Benjamin Louvet.