The United States has become the world’s top oil producer, passing Saudi Arabia and Russia to take the title. Owing in large part to the surge in hydraulic fracking production out of Texas and North Dakota, the United States is extracting 8.5 million barrels of oil per day. Taken together, the two states are equivalent to the world’s fifth largest oil producer.
Perhaps a bit of an understatement but this added production capacity is directly relevant to the WTI and Brent crude oil futures contracts. To date, supply-side changes such as the ones that we are currently seeing in the U.S. oil industry have presented market participants with valuable trading opportunities in the WTI/Brent spread. Since this will continue to be the case in the future, understanding some of the factors that tend to move the spread is important for anyone looking to capitalize on changing energy prices.
U.S. Public Policy
Last month, there was buzz going around that the United States would be lifting its ban on exporting crude oil. If realized, this policy change would produce ripple effects that could be felt throughout the world. The availability of cheap, high-quality U.S. crude oil globally would have a leveling effect on oil prices around the world. On a side note, as matters stand right now, gas prices at domestic gas stations are not exclusively tied to what happens in the domestic crude oil markets because the United States both imports and exports gasoline. It is cheaper to import surplus gasoline from Europe than to ship it from Texas by tanker. So gasoline prices here are not only driven by the domestic crude oil markets but global gasoline prices also. Instead of lifting the crude oil export ban outright, the U.S. Commerce Department gave two companies: Pioneer Natural Resources Co. and Enterprise Products Partners LP, permission to export a type of ultra-light oil known as condensate to foreign buyers who, in turn, can convert the product into gasoline, jet fuel and diesel. While this leaves the ban in place, the Obama administration still set an important precedent with this decision, allowing energy companies to start chipping away at the long-time ban on selling U.S. oil abroad.