The Brent-WTI spread, the difference between the front month futures price of North Sea Brent crude oil and that of West Texas Intermediate (WTI) crude oil, narrowed to $2.00 per barrel (bbl) as of October 15, after reaching a 2014 high of $14.95/bbl in January (Figure 1). The spread declined in the first quarter of the year primarily as a result of changes to crude oil infrastructure in North America which caused WTI prices to rise. The spread averaged $6.53/bbl from March through September.
The more recent narrowing of the spread since September is largely the result of declining Brent prices caused by a combination of lower demand and increased supply. Economic growth in Asia and Europe has been lower than expected. Sustained increases in Libyan crude oil production plus higher U.S. crude production that has backed out U.S. imports are raising crude supply in the global market.
Changes in the Brent-WTI spread not only reflect the relative strength or weakness in the markets for Brent and WTI, but the spread also affects the prices of many other types of crude oil that use these two crudes as reference points, or benchmarks, for establishing market prices.
A benchmark crude is a specific crude oil that is widely and actively bought and sold, and to which other types of crude oil can be compared to determine a price by an agreed-upon differential. The agreed-upon differential takes into account a number of factors, including quality characteristics such as API gravity or sulfur content, transportation costs from production areas to refineries, and regional and global supply and demand conditions, including refinery utilization. Use of the benchmark makes it easier for buyers and sellers to price the variety of crudes that are produced around the world.
The most widely used benchmarks are associated with crude oil that has stable and ample production; a transparent, liquid market located in a geopolitically and financially stable region to encourage price discovery; adequate storage to encourage market development; and/or delivery points at locations that allow arbitrage opportunities in world markets so that prices reflect global supply and demand.
Brent and WTI are two of the major crude oil benchmarks in the world. Dubai/Oman is a third.
Brent, which is the most widely used global crude oil benchmark, includes four separate light, sweet crude streams that are produced in the North Sea: Brent and Forties (produced offshore the United Kingdom) as well as Ekofisk and Oseberg (produced offshore Norway). In 2013, Brent crude oil loadings averaged 0.86 million barrels per day (bbl/d), representing about 1% of total world crude oil production of 76 million bbl/d. Brent is used to price light, sweet crude oil that is produced and traded not only in Europe, the Mediterranean, and Africa, but also in Australia and some countries in Asia.
WTI is a light, sweet crude oil produced in the United States that is priced at the crude oil trading hub of Cushing, Oklahoma. WTI is used as a benchmark for other types of crude oil produced in the United States, such as Mars, a medium, sour crude produced in the Gulf of Mexico, and Bakken, a light, sweet crude produced in North Dakota. WTI is also used as a benchmark for imported crude oil that is produced in Canada, Mexico, and South America.
Dubai/Oman is a third major benchmark crude. The prices of Dubai and Oman crude, both of which are medium, sour, are often averaged together to create a benchmark that is typically used to price crude oil produced in the Middle East and exported to Asian markets. Dubai crude oil production has steadily declined for more than two decades, and in 2013 was only 34,000 bbl/d. As a result, Oman crude oil, which reached 940,000 bbl/d of production in 2013, has been used to support the continued use of Dubai crude as a benchmark. Saudi Arabia's state-owned oil company, Saudi Aramco, uses the Dubai/Oman benchmark when determining the price of its crude oil sold for delivery to Asia. Brent and Dubai crude oil prices tend to be correlated, in part through the Brent/Dubai Exchange of Futures for Swaps, a highly traded, over-the-counter instrument that allows traders to convert to and from a Brent crude oil futures contract and a comparable forward month Dubai crude oil swap.
Like the Brent-WTI spread, the Brent-Dubai/Oman (Brent-Dubai) spread has narrowed in 2014 as the price of Brent has declined. As this spread narrows, Brent and Brent-priced crudes, like the West African crudes Bonny Light and Qua Iboe produced in Nigeria, become more competitive in Asian markets compared with Middle East crudes, like Arab Light. Saudi Aramco recently announced that it would lower the November 2014 differential to the Dubai/Oman benchmark for Arab Light crude oil delivered to Asia. As a result, Arab Light crude will price at a discount to the Dubai benchmark for a second consecutive month, which has not happened since the end of 2010.
Gasoline and diesel fuel prices decrease
The U.S. average price for regular gasoline as of October 14, 2014 was $3.21 per gallon, down nine cents from the previous week, and 15 cents less than the same time last year. The Midwest led the decline, down 11 cents to $3.08 per gallon, while the Gulf Coast followed with a decrease of 10 cents to $3.01 per gallon. The Rocky Mountain average dropped nine cents to $3.34 per gallon. The East Coast price decreased eight cents to $3.23 per gallon, while the West Coast fell seven cents to $3.54 per gallon.
Propane inventories rise
U.S. propane stocks increased by 0.7 million barrels last week to 81.4 million barrels as of October 10, 2014, 14.9 million barrels (22.4%) higher than a year ago. East Coast inventories increased by 0.3 million barrels and Gulf Coast inventories increased by 0.2 million barrels. Midwest inventories and Rocky Mountain/West Coast inventories both increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 3.0% of total propane inventories.