The ever-narrowing price gap between the world's twin crude oil benchmarks – Brent and West Texas Intermediate – has profound consequences across the supply chain for various stakeholders in the oil industry, including producers, refiners, traders and even consumers.
The futures prices of WTI and Brent oil over the past 13 years are heading much closer.
On June 30, 2011, Brent commanded a premium of $17.06 a barrel against WTI on futures exchanges. Fast forward to today, that premium has dwindled to a mere $3.14.
The narrowing gap is largely beneficial for US producers as they benefit from higher relative prices for WTI-priced crude, while European sellers of Brent-linked crudes may see reduced premiums.
However, the case is reversed for consumers.
“A wider spread often means lower prices for US consumers and higher prices for European consumers, while a narrower spread tends to align these prices more closely,” says Marc Pussard, head of risk at APM Capital.
Changes in the Brent-WTI spread can ultimately create major rifts that affect the prices of petrol and other refined products globally.
“This dynamic could influence production strategies and investment decisions in different oil-producing regions,” says Mohamed Hashad, chief market strategist at Noor Capital.
For example, a narrower spread means more challenges for oil producers who market Brent-linked crudes.
“Lower value added in Brent may leave less margin for producers based in regions such as the North Sea, Africa or even some parts of the Middle East, squeezing their profit margins,” says Mr Hashad.
Seismic shift
WTI is from the US while Brent crude comes from the North Sea in Europe.
Brent, which is traded on the Intercontinental Exchange, also known as Ice, is the world's most widely used reference for oil buyers, sellers, and traders.
WTI, which is traded on the Nymex futures exchange, is the preferred measure and price benchmark for crude oil in the US and accounts for a 20 per cent share of the world's global crude benchmarks.
Another distinction between the two lies in their sulphur content, with WTI having a lower level compared with Brent, thus making it easier to refine than its North Sea rival.
This variance, coupled with various logistical, regulatory and demand influences, frequently results in disparities in pricing.
For example, a noticeable gap emerged between Brent and WTI prices from 2011 to 2014, attributed to the surge in US shale oil production and the presence of transport obstacles within the US.
As bottlenecks began to form, WTI prices took a hit as they were discounted to account for the increased expenses of transporting barrels to market due to the lack of sufficient pipeline capacity.
“As the shale revolution ramped up last decade, US light sweet production produced in the Bakken, Permian and other shale plays had few outlets to international markets, since US law at the time prohibited crude exports,” says Aaron Brady, executive director of crude oil research at S&P Global Commodity Insights.
That changed towards the end of the last decade with the US making significant progress in addressing infrastructural challenges, resulting in a reduction in the spread and a rise in WTI prices.
The narrowing price differential, or spread, between the two benchmarks over the past decade is an indicator of the gradual “shift in the global oil market towards a greater dependence on the US [WTI] oil”, We Empower chief executive Andrea Zanon told The National.
“The US becoming the world's largest oil producer and expanding its infrastructure has narrowed the gap between WTI and Brent.
“This puts the US in a lead role influencing trading, policy, transparency and, ultimately, clear price signals.”
Who is affected?
WTI is the primary benchmark for oil pricing in North America, with prominent oil producers such as ExxonMobil and ConocoPhillips closely tied to it.
There are a few exceptions that are linked to Brent. For instance, Chevron prices the majority of its equity crude production based on Brent.
The same applies for European companies, with Brent the predominant benchmark for Shell, BP and TotalEnergies.
Most Middle East sour crude is priced against the Dubai Benchmark, which is priced against Brent.
The narrowing of the spread largely turns out to be beneficial for oil producers based in the US as they are able to compete effectively internationally.
Consequently, higher WTI prices lead to more profits and possibly larger market shares for them.
“For oil producers, the WTI-Brent spread is crucial for determining profitability. A wider spread, where WTI is cheaper than Brent, often indicates an oversupply of US oil, reducing profitability for producers linked to WTI,” says Vijay Valecha, chief investment officer at Century Financial.
“Conversely, a narrower spread can signal tighter US supplies or higher demand, potentially increasing revenues for these producers.”
The spread can have an impact on Opec’s decisions, analysts say.
One notable instance where Opec's decisions were influenced by a narrowing Brent-WTI spread was during the early 2010s, particularly around 2011 to 2014 when the spread widened significantly.
“Opec monitored these developments closely because the spread indicated how competitive US crude oil was in the international markets. A wider spread made US export of oil more attractive, potentially threatening Opec's market share,” says Mr Pussard.
“Thus, Opec, and Saudi Arabia in particular, made the decision to maintain high production levels in 2014, despite falling prices, to protect market share against the rising US shale oil industry.”
For oil refiners too, narrower spreads can have significant implications.
For example, from 2011 to 2014, the significant increase in the price difference created opportunities for refineries outside the US to benefit from cheaper WTI crude.
“The price spread encouraged US crude exports to Asia, where refineries sought to diversify their supply sources,” said Mr Pussard.
“Asian refineries, notably in South Korea and Japan, imported more WTI crude, benefitting from the lower prices and thus optimising their refining economics.”
Consumers are affected too by the widening spread.
When Brent rises, refineries pass on the costs to end consumers, Mr Valecha says.
However, for consumers in the US, the widening price difference is advantageous.
“When the spread between Brent and WTI widens, US consumers could benefit from lower gasoline prices, though the extent of this benefit depends on how much of the cost savings are passed on by refineries,” he adds.
“Conversely, a narrower spread can negatively impact consumers by reducing potential price relief.”
On the other hand, regions where Brent pricing prevails may experience more consistent or slightly lower prices.
Can WTI overtake Brent?
The narrowing trend is expected to continue as long as the US remains a net oil exporter and continues to expand its pipeline capacity, which, in turn, would reduce the cost of transporting its landlocked oil extracted from Texas and other locations in the Midwest to the US Gulf Coast for exports.
WTI’s “influence over global benchmark pricing has grown and will likely continue growing going forward”, says Emma Richards, associate director for oil & gas at BMI, a Fitch group company.
“The spread will likely narrow further with time … We now forecast the annual average spread to fall to around $2 a barrel within the next three years, down from over $4 a barrel currently.”
However, analysts caution that it still too early to judge whether WTI will overtake Brent to become the leading crude benchmark.
Going forward, key factors to watch out for are US crude production, geopolitical events and economic conditions affecting global supply and demand that will influence both benchmarks – potentially widening or narrowing the spread.
HOW%20TO%20ACTIVATE%20THE%20GEMINI%20SHORTCUT%20ON%20CHROME%20CANARY
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Desert Warrior
Starring: Anthony Mackie, Aiysha Hart, Ben Kingsley
Director: Rupert Wyatt
Rating: 3/5
The biog
Name: Dhabia Khalifa AlQubaisi
Age: 23
How she spends spare time: Playing with cats at the clinic and feeding them
Inspiration: My father. He’s a hard working man who has been through a lot to provide us with everything we need
Favourite book: Attitude, emotions and the psychology of cats by Dr Nicholes Dodman
Favourit film: 101 Dalmatians - it remind me of my childhood and began my love of dogs
Word of advice: By being patient, good things will come and by staying positive you’ll have the will to continue to love what you're doing
Benefits of first-time home buyers' scheme
- Priority access to new homes from participating developers
- Discounts on sales price of off-plan units
- Flexible payment plans from developers
- Mortgages with better interest rates, faster approval times and reduced fees
- DLD registration fee can be paid through banks or credit cards at zero interest rates
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
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Explainer: Tanween Design Programme
Non-profit arts studio Tashkeel launched this annual initiative with the intention of supporting budding designers in the UAE. This year, three talents were chosen from hundreds of applicants to be a part of the sixth creative development programme. These are architect Abdulla Al Mulla, interior designer Lana El Samman and graphic designer Yara Habib.
The trio have been guided by experts from the industry over the course of nine months, as they developed their own products that merge their unique styles with traditional elements of Emirati design. This includes laboratory sessions, experimental and collaborative practice, investigation of new business models and evaluation.
It is led by British contemporary design project specialist Helen Voce and mentor Kevin Badni, and offers participants access to experts from across the world, including the likes of UK designer Gareth Neal and multidisciplinary designer and entrepreneur, Sheikh Salem Al Qassimi.
The final pieces are being revealed in a worldwide limited-edition release on the first day of Downtown Designs at Dubai Design Week 2019. Tashkeel will be at stand E31 at the exhibition.
Lisa Ball-Lechgar, deputy director of Tashkeel, said: “The diversity and calibre of the applicants this year … is reflective of the dynamic change that the UAE art and design industry is witnessing, with young creators resolute in making their bold design ideas a reality.”
The biog
Hobbies: Salsa dancing “It's in my blood” and listening to music in different languages
Favourite place to travel to: “Thailand, as it's gorgeous, food is delicious, their massages are to die for!”
Favourite food: “I'm a vegetarian, so I can't get enough of salad.”
Favourite film: “I love watching documentaries, and am fascinated by nature, animals, human anatomy. I love watching to learn!”
Best spot in the UAE: “I fell in love with Fujairah and anywhere outside the big cities, where I can get some peace and get a break from the busy lifestyle”
White hydrogen: Naturally occurring hydrogen
Chromite: Hard, metallic mineral containing iron oxide and chromium oxide
Ultramafic rocks: Dark-coloured rocks rich in magnesium or iron with very low silica content
Ophiolite: A section of the earth’s crust, which is oceanic in nature that has since been uplifted and exposed on land
Olivine: A commonly occurring magnesium iron silicate mineral that derives its name for its olive-green yellow-green colour
Dark Souls: Remastered
Developer: From Software (remaster by QLOC)
Publisher: Namco Bandai
Price: Dh199
Suggested picnic spots
Abu Dhabi
Umm Al Emarat Park
Yas Gateway Park
Delma Park
Al Bateen beach
Saadiyaat beach
The Corniche
Zayed Sports City
Dubai
Kite Beach
Zabeel Park
Al Nahda Pond Park
Mushrif Park
Safa Park
Al Mamzar Beach Park
Al Qudrah Lakes
UAE currency: the story behind the money in your pockets
INDIA SQUAD
Virat Kohli (capt), Rohit Sharma, Shikhar Dhawan, KL Rahul, Vijay Shankar, MS Dhoni (wk), Kedar Jadhav, Dinesh Karthik, Yuzvendra Chahal, Kuldeep Yadav, Bhuvneshwar Kumar, Jasprit Bumrah, Hardik Pandya, Ravindra Jadeja, Mohammed Shami
More coverage from the Future Forum
Dhadak 2
Director: Shazia Iqbal
Starring: Siddhant Chaturvedi, Triptii Dimri
Rating: 1/5
Mohammed bin Zayed Majlis
Brief scores:
Day 1
Toss: South Africa, field first
Pakistan (1st innings) 177: Sarfraz 56, Masood 44; Olivier 4-48
South Africa (1st innings) 123-2: Markram 78; Masood 1-4
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How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
Previous men's records
- 2:01:39: Eliud Kipchoge (KEN) on 16/9/19 in Berlin
- 2:02:57: Dennis Kimetto (KEN) on 28/09/2014 in Berlin
- 2:03:23: Wilson Kipsang (KEN) on 29/09/2013 in Berlin
- 2:03:38: Patrick Makau (KEN) on 25/09/2011 in Berlin
- 2:03:59: Haile Gebreselassie (ETH) on 28/09/2008 in Berlin
- 2:04:26: Haile Gebreselassie (ETH) on 30/09/2007 in Berlin
- 2:04:55: Paul Tergat (KEN) on 28/09/2003 in Berlin
- 2:05:38: Khalid Khannouchi (USA) 14/04/2002 in London
- 2:05:42: Khalid Khannouchi (USA) 24/10/1999 in Chicago
- 2:06:05: Ronaldo da Costa (BRA) 20/09/1998 in Berlin
Classification of skills
A worker is categorised as skilled by the MOHRE based on nine levels given in the International Standard Classification of Occupations (ISCO) issued by the International Labour Organisation.
A skilled worker would be someone at a professional level (levels 1 – 5) which includes managers, professionals, technicians and associate professionals, clerical support workers, and service and sales workers.
The worker must also have an attested educational certificate higher than secondary or an equivalent certification, and earn a monthly salary of at least Dh4,000.
The biog
Favourite food: Fish and seafood
Favourite hobby: Socialising with friends
Favourite quote: You only get out what you put in!
Favourite country to visit: Italy
Favourite film: Lock Stock and Two Smoking Barrels.
Family: We all have one!
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
500 People from Gaza enter France
115 Special programme for artists
25 Evacuation of injured and sick
