Energy independence and the WTI/Brent spread

America is in the midst of an energy revolution. Crude oil production is up over 40% since the start of 2012 and is currently at levels not seen since May of 1988. The surge continues and is not expected to stop any time soon with North Dakota and Texas leading the way.

In fact, if Texas was its own country, it would rank as the 10th largest producer of energy based off of international oil production in October. In mid-2009, Texas was producing less than 20% of America’s domestic crude oil. In January of this year, this figure hit a new record high of 36.2%. A telling chart going around is the weekly U.S. crude oil production chart which shows highs last seen in 1988.

The WTI (West Texas Intermediate) vs. Brent spread is an interesting relationship that energy traders have been looking at over the past couple of weeks. Theoretically, the two crude oils share similar qualities and should price very closely to each other. By pure make-up of the products WTI should have a slight premium to Brent. The spread between WTI and Brent crude represents the difference between the two crude benchmarks. WTI typically represents the price oil producers receive in the U.S. whereas Brent reflects prices received internationally. The recent production surge in the U.S. has caused a build-up of crude oil inventories at Cushing, Oklahoma, where WTI is priced. This created a supply and demand imbalance at the hub, causing WTI to trade lower compared with Brent.

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