The differential between the spot prices of Brent and West Texas Intermediate (WTI) crude oils, referred to as the Brent-WTI spread, averaged $19 per barrel in August 2012. According to the U.S. Energy Information Administration's (EIA) September Short-Term Energy Outlook (STEO), the spread, which reflects differences in transportation costs, crude oil quality, and production or distribution system operating constraints is expected to drop to about $9 per barrel by the end of 2013. It should narrow further in 2014 as pipeline capacity to deliver WTI crude oil to refineries on the U.S. Gulf Coast (USGC) expands.
Historically, the Brent-WTI spread ranged from about ± $5 per barrel. However, in early 2011, the startup of the TransCanada Cushing Extension (Keystone Phase 2) pipeline, which allowed greater volumes of Canadian crude oil to be moved into Cushing, caused the price of WTI to decline versus Brent, increasing the spread from around $4 per barrel in early 2011 to almost $30 per barrel by September 2011 (Figures 1 and 2).
Because its quality is similar to that of WTI, Brent crude can be substituted for WTI to meet delivery obligations against New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil futures contracts. Prior to 2011, Brent could be economically brought into the United States by tanker and moved by pipeline from the USGC to Cushing, Oklahoma. On average, Brent crude oil traditionally sold at a small discount to WTI, reflecting marine and pipeline transportation costs.
With increased crude oil production from U.S. tight oil plays, particularly from the Williston Basin in North Dakota, and the February 2011 start-up of the Keystone Phase 2 pipeline from Steele City, Nebraska to Cushing, crude oil inventories in Cushing began to rise because there were no pipelines to move this new volume of crude, which exceeded the demand from Midwest refiners, from Cushing to Gulf Coast refineries. A few months before the TransCanada pipeline was completed, the Brent-WTI differential started to rise, from an average $2 per barrel in December 2010 to an average $15 per barrel in February 2011. The WTI discount reached a high of about $29 per barrel in September 2011.
The reversal of the 150,000-barrel-per-day (bbl/d) Seaway pipeline between Cushing and the Gulf Coast in the fourth quarter of 2011 contributed to a decline in the Brent-WTI differential to an average of $9 per barrel in December 2011. However, by March 2012, as it became clear that the Seaway reversal would be insufficient to clear the bottleneck between Cushing and the USGC, the WTI discount rose back to an average $19 per barrel. Over the last five months the monthly average Brent-WTI differential has ranged from $13 per barrel to $19 per barrel.