A Broader Outlook for Crude Oil Prices
(Continued from Prior Part)
WTI trades at discount to Brent
WTI traded at a discount to Brent, sometimes by $5–$10 per barrel, due to the rapid increase in oil production from the United States where the WTI market is based.
Oil markets expected the United States to see a relatively swift drop in production, which would push up WTI. As a result, by January 2015, the spread between WTI and Brent was closer.
Lower oil prices eat up margins of oil producers
Low oil prices are affecting oil producers such as ConocoPhillips (COP), Chevron (CVX), Occidental Petroleum (OXY), and Apache (APA), as they get lower prices for their products. Low prices also affect the iShares US Energy ETF (IYE).
Lower prices also don’t bode well for MLPs such as Plains All American Pipeline Partners (PAA), which transports crude oil. Lower prices could translate into lower produced and transported volumes.
EIA forecasts on WTI-Brent spread
The EIA (U.S. Energy Information Administration) estimates that the WTI-Brent spread on a yearly average will be $7 per barrel in 2015 and only $5 per barrel in 2016. Non-market oil producers control a large portion of oil capacity around the world.
A fall in supply could disproportionately occur in the United States. Put another way, OPEC (Organization of the Petroleum Exporting Countries) will continue to produce, even though oil prices are low, but market actors in the United States won’t be able to do the same.
The result could be a narrowing of the WTI-Brent spread, and we could actually see WTI overtake Brent. That’s the conclusion of a recent report from Bank of America, which predicts that WTI will trade at a premium to Brent in the spring of 2016.
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