The spread between benchmark crude oil prices for WTI and Brent recently widened to over $10 per barrel after reaching parity this past summer, and signals indicate this is partially due to an oversupplied US Gulf Coast refining center. It also suggests that equity investors might want to be wary of US Exploration & Production (E&P) stocks in Q4, while refining stocks could get a boost from lower WTI prices.
The price movement of Light Louisiana Sweet – essentially the US Gulf Coast benchmark – indicates that refiners are currently well supplied and not purchasing crudes with Brent price linkage, according to analysts at consultancy RBN Energy.
“This sudden divergence in the Brent price runs counter to the thinking of many analysts. That is because it signals that US Gulf refineries currently have adequate crude supplies and do not need imported barrels – certainly of light crude but also of medium grades as well – i.e. any crudes with prices linked to Brent. If there were demand for these imported barrels then theoretically the price of LLS would be tracking closer to Brent because those imports would compete with LLS for the attention of Gulf Coast refiners. With LLS at a near $6/Bbl discount to Brent the Gulf Coast is not attracting imports.” – RBN Energy Daily Blog, October 20, 1013
US crude prices have separated from the international market as US intervention in Syria appears much less likely. Brent prices are experiencing upward pressure from strong Eastern European demand – as those economies appear to be strengthening post-recession – and supply shortfalls from Libya and elsewhere.
For investors looking at the US oil sector, the Street’s Dan Dickers says in the below video, “WTI is almost an anomaly that represents what a certain number of E&P companies and a certain number of refineries can capture in a certain area of the country. Now that’s not insignificant because it will put some pressure on E&P companies going into the 4th quarter and add some tailwind to some of the refiners.”
