The Brent-WTI spread, the price differential between Brent crude oil and West Texas Intermediate (WTI) crude oil, averaged just over $3 per barrel in July, its lowest monthly average since December 2010. The spread has been declining steadily since early this year, as midcontinent light sweet crude demand has increased and infrastructure improvement projects have allowed more U.S. crude production to reach refining centers on the Gulf Coast, in the East and on the West Coast, thereby putting upward price pressure on WTI. However, in its August Short-Term Energy Outlook (STEO), EIA forecasts the spread will widen from current levels to average $5 per barrel during the fourth quarter of 2013 and almost $7 per barrel for 2014 (Figure 1).
The spread began declining in early 2013 as new and expanded crude-by-rail and pipeline capacity made it possible to deliver crude oil directly from production areas to refining centers, bypassing congestion at the Cushing, Oklahoma, crude storage hub. Record high refinery crude runs, due to increased capacity and utilization on the Gulf Coast and further supported by the startup of a 250,000-barrel-per-day (bbl/d) crude distillation unit at BP's Whiting, Indiana, refinery, combined with maintenance at Canadian Syncrude processing facilities, helped to push up the price of WTI relative to that of Brent in July, compressing an already-narrowing Brent-WTI spread to the narrowest level in years.
EIA expects the recent sharp reductions in the Brent-WTI differential to be relatively short-lived, as refinery utilization rates decline from recent highs to lower post-summer seasonal levels and as crude oil production in North America continues to increase, outpacing takeaway capacity.
In the August STEO, EIA projects that refinery runs will fall from their recent high of 16.0 million bbl/d in July 2013 to averages of 15.7 million bbl/d and 14.9 million bbl/d in the third and fourth quarters of the year, respectively. Demand for WTI-grade crude oil in particular is expected to decline with the anticipated startup of new coking capacity at the BP Whiting facility late this year.
EIA also projects that U.S. lower-48 crude oil and Canadian liquids fuels production, which averaged 9.37 million bbl/d in the first half of 2013, will average 10.02 million bbl/d in the second half of 2013 and 10.75 million bbl/d in 2014, with most of the growth coming from tight oil produced from the Bakken, Eagle Ford and Permian Basin formations in the United States. Total production from these three formations is estimated to have averaged 3.0 million bbl/d during the first half of 2013, and EIA projects it will increase to 3.4 million bbl/d in the second half of the year and to 3.9 million bbl/d during 2014. To the extent that these production increases are not realized, there would be less downward pressure on WTI prices, and therefore a lower price discount to Brent, narrowing the spread.