Brent-WTI Spread Falls To 6-Month Lows

Includes: UNG, USO
by: Bespoke Investment Group

The chart below shows the performance of Brent (Global benchmark price) and WTI (U.S. benchmark price) crude oil over the last six months. For the last couple of years, the major trend between the two benchmark prices has been that Brent crude oil was rising at a faster pace than WTI. While the two benchmark prices historically traded pretty much in line with each other, the spread widened to record (second chart) levels in the last couple of years as increased production in the U.S. and geopolitical tensions in the Middle East were just two of the factors that contributed to the price disparity.

Over the last few weeks, though, Brent and WTI crude oil have switched roles. While WTI crude oil has been showing signs of strength, Brent crude oil has been trending lower. One reason behind the change in roles is due to strong economic data in the U.S. and weakness in Europe. As a result of the changed roles between Brent and WTI, the spread has nearly been cut in half over the last two months, and it is now at its lowest level since July and within two dollars of a 52-week low.

So why should anybody who doesn't trade commodities for a living care about the price of crude oil in Europe and the spread between it and oil prices in the U.S.? The reason is that for anybody who drives a car, these prices matter a lot. The chart below shows the price of Brent crude oil relative to gasoline prices over the last six months. As shown, there has been a close relationship between the two commodities during this period, where Brent crude oil prices have even led prices at the pump. Most recently, Brent crude oil prices peaked on Feb. 8 and gasoline prices topped out nearly three weeks later on the 26th. As long as Brent prices continue to drift lower, it should put downward pressure on gasoline prices, even if WTI prices drift higher.