How WTI Became A Player In The Global Oil Market

As U.S. crude oil production surged over the past decade, West Texas Intermediate prices became deeply depressed relative to international benchmarks. A change in the law fixed that and turned the U.S. into a major crude oil exporter.

Oil markets are global, and therefore oil prices around the world generally move in tandem. There are differences in oil prices based on quality and geography, but the fungible nature of oil usually prevents specific benchmarks from getting too far out of line with other benchmarks.

In the U.S., we are most familiar with the West Texas Intermediate (WTI) benchmark and the internationally traded Brent crude. WTI is of slighter higher quality than Brent, and prior to about 2006 WTI almost always traded at a $1-$2/barrel premium over Brent.

In 2007, that WTI premium became a WTI discount, which grew to more than $10/barrel from 2010 through 2013.

(Click on image to enlarge)

WTI and Brent Prices 1987 to 2017

What happened during those years? The U.S. government had a crude oil export ban in place, so the shale oil boom meant that the U.S. was suddenly and unexpectedly awash in crude oil.

U.S. refiners could refine that oil and export finished products — which they did. But domestic refiners had invested billions to process imported crudes that were becoming heavier and sourer. Because of the capital expenditures that had been made to process this oil, the economics favored heavy, sour crudes over the light, sweet crude oil from the shale oil plays.

Thus, even though crude oil is globally traded, because of the crude oil export ban, WTI was really a more localized market (similar to U.S. natural gas). Refiners had an abundant crude supply, which for them wasn’t the ideal quality. There were also logistical constraints in getting some of the new production to refiners. So, the WTI discount developed.

In December 2015, President Obama signed a $1.15 trillion spending bill that gave renewable energy producers a number of concessions in exchange for repealing the crude oil export ban. Refiners lobbied hard to preserve the export ban, while crude producers lobbied to get it repealed.

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