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Why the WTI Vs. Brent Crude Spread Is Shrinking

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The price of Brent Crude oil has slipped 3% this year while the price of West Texas Intermediate oil has increased by 13%. Here's why.

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The spread between West Texas Intermediate (WTI) and Brent Crude oil has long been under the microscope for energy traders across the world. The past few years have seen this spread heavily favor Brent, as it has been trading at a premium to its Western cousin for quite some time. But as 2013 unfolds, the spread has been steadily narrowing, much to the surprise of a number of analysts.

Brent Vs. WTI

The difference between these two forms often oil boils down to API gravity figures, sulfur content, and often the location of where the oil is discovered. WTI dominates the Western world while Brent has a stronghold on the East and a larger representation in the global oil space. In recent years, Brent has been outperforming WTI, leading to higher spreads. But Brent has been slipping, returning approximately 3% this year while WTI has gained more than 13%.

The spread was relatively wide in 2012 as increased output from the US could not be fully supported by existing pipeline infrastructure. "The Brent-WTI spread began to narrow considerably in March and by July the spread averaged just slightly above $3 per barrel, dipping to the lowest level since the start of 2011," notes the EIA.

Why the Spread Has Narrowed

The EIA cited a number of reasons for the spread's contraction, with new transportation and pipelines being a major source. The new infrastructure has helped alleviate supply bottlenecks, which caused WTI prices to rise. It should also be noted that domestic refineries have been running at highs not seen since 2007, which has also given WTI prices a bit of a bump.

From the other side of the equation, the increase in pipelines has allowed domestic producers more access to crude. There are certain domestic crudes with an overall makeup very similar to Brent, allowing refineries to cut on their imports of Brent. This pinch has been keeping Brent prices in check, even in the wake of the Syrian crisis.

Syria and Brent

The two forms of crude had nearly erased the gap between them until tensions in the Middle East flared up yet again. The past few weeks have seen that gap widen, as Syria remains one of the biggest question marks left for Brent.

When the US was threatening a strike, Brent prices jumped as this would undoubtedly interrupt the flow from one of the most important oil-producing regions of the world. As the tensions have cooled, so too has Brent's price. Should a diplomatic solution be found in regards to Syria, Brent would likely sink back down and narrow the spread even further.

But be careful: Any kind of military strike in that region would send Brent higher. Even if a strike would not impact refineries or pipelines, the mere news of an impending military conflict will cause this commodity to immediately trade higher. The EIA expects the spread between the two to rise a bit and close the year out around $6, but that all hinges on what happens in Middle East. Anyone trading these commodities would do well to keep their ear to the ground and finger on the trigger for any major news out of the East.

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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.
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