WTI-Brent crude: Moving oil to a new normal

Probably the most closely watched spread in the commodity universe is that between Cushing, OK-based West Texas Intermediate (WTI) crude oil, and the North Sea-based Brent crude oil. The relationship between the two largest benchmark prices for global crude oil was historically very tight, with Brent typically trading a few dollars below WTI. In 2010 the balance shifted dramatically, Brent crude skyrocketed relative the WTI, and what was once a sleepy spread market became extremely volatile (Chart 1). It is important to note that this was not a case of European or world oil prices rising relative to U.S. crude, as most benchmark prices, both globally as well as in the U.S., kept pace with Brent. The widening of the WTI-Brent spread was the direct result of a large buildup of supplies in landlocked Cushing, OK, which was unable to reach the global market, and therefore began to trade at a discount.

Supplies in Cushing may have been the cause behind the expanding spread differential. However, the supplies themselves were merely a symptom of a much larger structural shift in the U.S. crude market that will most likely have a pronounced effect on domestic supply and by extension on world prices for years to come. Technological advances that were initially developed to extract natural gas from shale deposits (and have since depressed domestic gas prices, Chart 2), were applied to so-called “tight oil,” allowing domestic production to surge over the past few years.

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