The price difference between Brent crude and West Texas Intermediate crude narrowed this week to its lowest level since late 2010, and economists at Capital Economics now expect the spread to disappear by the end of this year.
As of Friday afternoon, August Brent crude /quotes/zigman/2735836UK:LCOQ3traded at around $107.22 on ICE Futures, while August WTI crude /quotes/zigman/2291781CLQ3was at around $103 on the New York Mercantile Exchange.
That indicates a spread of about $4.22. The gap hasn’t been this narrow since December 2010. It was at more than $20 in February, data from FactSet show.
The collapse in the differential primarily reflects “the prospect of further easing of the logistical constraints that have been holding back” WTI, said Julian Jessop, head of commodities research at Capital Economics, in a research note dated Thursday.
He said he expects the spread narrowing to “soon become permanent.”
Since 2011, Brent has traded at a substantial premium to WTI because of transportation issues linked to the pricing and distribution hub for WTI in Cushing, Okla.
But the U.S. Energy Information Administration earlier this year estimated that new projects would provide 1.15 million barrels per day of additional pipeline capacity to delivery crude from Cushing to the Gulf Coast, with another 830,000 barrels per day planned to move crude directly from the Permian Basin to the Gulf, according to Capital Economics.
“This should reduce the excess inventories at Cushing, lower the cost of shipping WTI to where it is most in demand and allow it to compete on a more level playing field with Brent … all helping to collapse the Brent-WTI spread,” said Jessop.
Capital Economics had previously forecast that the Brent-WTI spread would narrow to $5 by the end of the year, but now expects it to “disappear completely.”
“We continue to expect Brent to finish this year below $100 and to fall further thereafter, so this convergence would still be consistent with renewed falls in the price of WTI too,” said Jessop.