The spread between U.S. West Texas Intermediate and Brent crude futures narrowed to its tightest level since September 2023 on Friday as U.S. prices rose on a sliding rig count and Canadian wildfires that cut supplies, analysts and traders said.
U.S. futures ended the week 4.9% higher, while Brent futures rose 2.75%, as OPEC+ output increases put a cap on gains.
WHY IT’S IMPORTANT
A narrower spread indicates a closed arbitrage window for traders and weaker shipping economics to Europe and Asia. The tighter spread can act as an early indicator that U.S. crude exports will likely fall in the next few weeks, assuming the premium for Brent crude remains weak.
The inclusion of WTI-Midland crude in the dated Brent index has meant that the spread between the two is increasingly correlated to freight rates, as the price of Dated Brent is set by WTI Midland on many trading days.
BY THE NUMBERS
The spread between the two crude benchmarks narrowed to as little as $2.78 a barrel during the session on Friday. A discount of $4 per barrel is typically considered the level that encourages U.S. exports to Europe, as traders see an open arbitrage route.
The spread has remained narrower than $4 a barrel since May 1, according to data from LSEG, partly due to concerns around U.S. production, helping keep more barrels onshore, according to Phil Flynn, senior analyst with Price Futures Group.
CONTEXT
Since April, OPEC+ countries including Saudi Arabia and Russia have made or announced increases totaling 1.37 million barrels per day, or 62% of the 2.2 million bpd they aim to add back to the market. Meanwhile the U.S. oil and gas rig count, an early indicator of future output, fell by four to 559 in the week to June 6, the lowest since November 2021, energy services firm Baker Hughes said in its closely followed report on Friday, stoking some concerns around future U.S. production. This has helped create pricing that encourages U.S. oil to remain in the domestic market, traders and analysts said.
Wildfires burning in Canada’s oil-producing province of Alberta have further buoyed U.S. crude futures, analysts said, with Canadian daily crude production down by about 7%.
“With Canadian wildfire season underway, further disruption could push the WTI/Brent spread below $3 this summer,” said analysts at Sparta Commodities.
KEY QUOTES
“When you look at the WTI/Brent spread, you can see the concerns a little bit around leveling off U.S. production and concerns about export barrels tightening up,” said Price Futures Group’s Flynn.
(Reporting by Georgina McCartney and Arathy Somasekhar in Houston; Editing by Lisa Shumaker)