EIA forecasts Brent-WTI price spread narrowing to $4 per barrel in 2018

The price difference between West Texas Intermediate (WTI) crude oil and the global crude oil benchmark, Brent, will hold at $6 per barrel in early 2018 before dropping to $4 per barrel, according to Energy Information Administration (EIA) projections released on Wednesday.

The price spread forecast for WTI-Brent in the EIA Short-Term Energy Outlook (STEO) for November was approximately $1 per barrel less than the previous month’s forecast. That’s due in part to constraints in transporting crude from Cushing, Oklahoma, and the Permian basin in Texas to the Gulf Coast.

Demand for transportation infrastructure has accompanied increased U.S. crude oil production in recent months, EIA reported. In particular, crude oil production in the Permian basin will average 9.4 million barrels per day the latter half of 2017 — 340,000 barrels per day more than in the first half.

“The transportation constraints between inland domestic crude oil production and the Gulf Coast have resulted in relatively high levels of crude oil inventories in Cushing,” EIA reported. “Total commercial U.S. crude oil inventories declined by 25 million barrels from the last week of July to the week ending Nov. 3, but inventories in Cushing increased by 8.8 million barrels. The inventory builds at Cushing have pushed its inventories 51 percent higher than the five-year average, while inventories for the United States as a whole and in the Gulf Coast region are only 15 percent and 10 percent higher than their respective five-year averages.”

Direct WTI-Brent competition in global markets has been another contributing factor to the price spread, EIA reported. Removal of export restrictions on domestic crude oil in December 2015 has led to a rise in the transport of light sweet crude oil from the Gulf Coast to Asia.

“To compete with Brent in Asia, WTI prices must reflect the additional transportation costs U.S. crude oil exports incur on their way to Asia,” EIA reported. “Although more infrastructure to export crude oil has been built recently, U.S. exporters must still use smaller, less-economic vessels or complex shipping arrangements, which add to costs.”

The cost of shipping WTI from the United States to Asia is approximately 50 cents more per barrel than the cost of shipping Brent from the North Sea to Asia, EIA reported.