The Positive Side of the WTI-Brent Spread

by | published February 17th, 2012

The spread between the West Texas Intermediate (WTI) benchmark crude contracts traded on the NYMEX and Brent crude traded in London is widening again.

When the market closed yesterday, the spread once again approached 20% of the WTI price (This is more accurate way to measure the spread).

Brent is fast approaching $122 a barrel; WTI stands north of $102.

Both benchmarks have accelerated; and both are now up 2.5% for the week.

Brent is also up 10.2% for the month, while WTI started its climb just recently. All of its monthly gains (at 2.4%) occurred in the past week.

But it's not just the rising price tag that has us concerned.

We are fast approaching that time of year when gasoline and diesel demand are at their peak.

In the U.S., more than 20 municipalities will introduce new summer gasoline mixtures by May 1.

Now you might never have heard of this. But there are two types of seasonal gasoline.

There is a winter-blend and a summer-blend fuel.

The summer blend is mixed to cause less smog from its emissions. It is also designed to reduce pressure in your gas tank when summer weather reaches scorching temperatures.

Those additives traditionally add about 15% to the cost of a gallon of gas. And, the transition requires that U.S. refineries temporarily retool their production capabilities, which can lead to a short-term supply dip.

We will certainly see the highest gasoline costs on average in the U.S. market this summer.

Just how high?

We will be pushing $5 a gallon, even if the Iranian drama mellows, and no one closes the Strait of Hormuz.

Kent, You Mentioned a Positive Side to This?

In the Midwest, refinery capacity has been strained; however, there is a glut of crude coming from Canada, which is creating a discount for these companies.

By the beginning of this week, discounts to refiners were resulting in a barrel of Canadian synthetic crude from the oil sands going for as much as $40 below the price it could command on the world market.

This results from three things:

  1. Rising Canadian production in Alberta's oil sands
  2. Rising production in the Bakken tight oil field in North Dakota; and
  3. Diminishing pipeline capacity moving crude to the 10 largest refineries in places like Illinois, Ohio, Indiana, and Minnesota.

Simply put, oil is “backing up” in the Midwest, and crude contract prices are restrained as a result.

But what I find so surprising about this situation is the time frame.

The Keystone Quandary Will Be Solved

Like everyone else analyzing the markets, I agreed that the pipelines in the Midwest would reach their capacity in 2016 – about the same time the Keystone XL (the next stage in the massive pipeline system down from Canada) would be ready.

Yes, we know that Keystone is having its political problems right now.

But it will be approved.

Engineers will alter the pipeline route, and construction will begin.

However, it now looks like maximum capacity in the Midwest will occur in 2013, three years earlier than expected.

Canadian producers would like their oil to reach the most desired U.S. refinery market – the Gulf Coast.

But since the bottleneck is forming well north of Cushing, Oklahoma (where the NYMEX daily rate is determined, and the greatest concentration of pipeline interchanges is located) that is not going to happen until more pipeline capacity is added further up in the Midwest.

This brings us back to why Keystone XL is necessary.

As I said, there is this glut. But why is that positive?

It's because Midwestern refineries are able to use the WTI-Brent spread to their advantage.

Despite resulting price increases from that spread, the processing costs are actually declining in the Midwest.

That means refinery margins – the difference between what it costs to produce products from crude oil and the price those products can command on the wholesale market – are improving.

This means refinery profits are ready to pop.

But there are other important reasons this is true.

First. the growing supply of Canadian and Dakotan crudes has largely shielded Midwest refiners from the price impacts of dwindling North Sea output, and various other supply concerns going to a rising Brent price.

By playing the WTI-Brent spread, therefore, refiners in this part of the country are actually making money.

That is unlikely to stop until the supply glut is reduced.

It's having an upward effect on refining profits as a whole. This has been shown in the improvement of refinery stocks recently.

There is certainly still volatility in the refining market segment (as in the oil sector as a whole).

Yet refiners can play another kind of spread to offset it – so long as the prices of the crude oil flow upon which they depend remain subdued and demand continues to increase.

In the Midwest, the first of these two considerations will remain until additional capacity is added to the pipeline network.

A second is that unlike other parts of the world, demand in the American market has been slow to return.

Yet we are poised to see that change as we get closer to Memorial Day.

The precursors are already taking shape.

Here, that “other” spread refiners can use to offset pricing volatility kicks in. This is the “crack spread,” which relates available crude to the amount of products like gasoline and heating oil produced from it.

You can even trade crack spreads in the futures markets.

But for the refiner, this is like dealing poker and being able to see the hand everybody else is holding.

By using what is called a “crack ratio,” the producer can actually balance the available oil flow with the various products realized from processing it to end up with heightened profit levels.

Now this does not work all the time.

But as we move into the summer driving season, it is likely to prove successful for Midwestern refiners.

As the price of crude continues to increase, as the WTI-Brent spread continues to widen, and as the discount remains in place for Canadian oil, the crack ratio will work more often than not.

That means greater profits for the companies running those region-specific refineries and the investors holding stock in them.

However, I still need to put this in perspective.

Gasoline prices for everybody will be rising an average of 3.6 cents per gallon at the pump for each $1 price in a barrel of oil. Oil from Canada and North Dakota will still be discounted, yet its price will still be going up.

Just not as high as elsewhere.

For followers of U.S. reality TV, it seems there was another reason for Kim Kardashian to consider moving to Minnesota.



Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at

  1. Gene Moore
    February 17th, 2012 at 14:19 | #1

    This question is directed to Dr. Moors. In the Energy Advantage newsletter you discuss how to make 2,246% by buying the OIL March 30
    calls. This was based on the oil constriction that you saw coming.
    Could you please tell me if this is still a viable trade or have things


  2. Robert Berke
    February 17th, 2012 at 14:21 | #2

    “A second is that unlike other parts of the world, demand in the American market has been slow to return.

    Yet we are poised to see that change as we get closer to Memorial Day.”

    I’ll bet your readers would be interested in the rationale for the above listed comment

  3. John Walker
    February 17th, 2012 at 17:05 | #3

    No body paid any attention to Obama when he was interviewed before taking office. He was asked about how he felt about the gas being so high at the time. His statement was that he wanted to see gas above $5.00 a gallon in the US. But he thought the breif spike we had seen a few months before had risen to quickly and he wanted it to happen a little slower and not until after the 2012 election. I’m sorry but Kent being a lover of Obama will not tell you that. Obama has been true to what he said is working to be sure that the US pays well north of $5.00 at the pump. I don’t understand why people watched that interview on national TV yet did not pay attention to it or what has happened since. Invest with this in mind, it will cause high inflation on everything you buy.

  4. Bernard Durey
    February 17th, 2012 at 19:15 | #4

    Well one point of interst is someone has amde the comment that at the pump gas prices are higher then they have ever been at this time of the year. What does that tell us?

  5. February 17th, 2012 at 20:36 | #5

    I have a email about the new Eagle Diesel. Is it true? I am a subscriber

  6. Sailor Jo
    February 17th, 2012 at 22:21 | #6

    @Bernard Durey

  7. Sailor Jo
    February 17th, 2012 at 22:25 | #7

    @John Walker
    As a European I am used to high prices for gasoline. But as someone said: In Europe a car is an option, not must-have. When I came to Florida more than 20 years ago I noted: “If you do not have a car it is like your legs are amputated”.

    If Obama meant to rack up the price like in Europe to pay for infrastructure I would not mind. Taking additional taxes to free up money for the military – I do mind.

  8. Richard UK
    February 18th, 2012 at 09:26 | #8

    This question is similar to Gene Moore’s question. It is also directed to Dr. Moors, and the fact that at the beginning of the year he was convinced that there would be an oil supply constriction in the first half of this year due to the low crude prices from 2-3 years back. So convinced in fact that he offered a full refund to new Energy Advantage subscribers if the price of crude did not rise to around at least $150-$160 by this summer based on this exact scenario playing out.

    But now it would appear that the oil situation is quite the opposite, as there is a supply glut. And combined with a fall in energy demand and a lack of transportation infrastructure, it would appear that this glut may be with us for a while.

    So my question is Dr. Moors.. has your view of this oil constriction scenario changed at all in light of this new oil supply glut. Or are you still of the opinion that this oil constriction will happen, but that the time frame must now be extended.



  9. February 18th, 2012 at 15:56 | #9

    Obummer does not like the military. He wants to
    collapse our system,as a good Saul Alinsky/Cloward & Piven
    accolyte would. And since he’s gotten into office he is
    doing all in his power to do that. And to deconsruct America.
    Anti-freedom, capitalist and Constitution marxist that he is.

  10. Jim Saeger
    February 19th, 2012 at 05:39 | #10

    Correction: Sandridge Mississippian Trust I symbol is “SDT” not SDK.

  11. February 29th, 2012 at 20:58 | #11

    why don”t you come out directly with your recommendations,instead of giving us your lectures-which we don”t care about- we cARE ABOUT MAKING MONEY AND NOT WASTING TIME READING YOUR INTELLECTUISM. pLEASE CANCEL MY ISSUE.

  12. eric taylor
    March 8th, 2012 at 18:45 | #12

    I am not against the Canadian pipeline, but the critics have a point
    that most of the long term jobs are going to the Canadian’s for the
    export market opportunity and not to lower the U.S. gasoline prices.
    My educated guess is that it is better to refine the heavy crude oil
    in the country of use, because synthetics may take 10X longer to break
    down in the environment, and I would not want to completely destroy
    the worlds oceans. The fast living Texan refineries should research the real world effect of a synthetic oil spill versus an organic one.
    Doctor Moors you must have better knowledge on the subject than I do?

  13. enthusceptic
    March 29th, 2012 at 12:16 | #13

    John, many of us love Dr. Moors’ “intelletualism”. If you pay you will get advice, and remember to do your own homework. Just blaming the teacher will not help.

  1. No trackbacks yet.
Comments are closed.