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Brent/WTI Spread Narrows to 4 ½ Month Low

Prices between the two major oil benchmarks – Brent and WTI – have narrowed to their lowest level in four and a half months. WTI closed at $102.42 on February 26 and Brent at $108.81.

Historically, the two benchmarks had moved together, indicating a single global price for crude oil. But a gulf between the two opened up in early 2011 as the U.S. shale revolution kicked into high gear. The upswing in oil production was such that there wasn’t enough infrastructure to move all that oil around, and the WTI price began to trade at a discount. Around the same time, geopolitical events around the world – the Arab Spring, the Libyan revolution – knocked some oil offline and put a higher risk premium on Brent prices. The two benchmarks diverged.

Related Article: Four Countries that Could Send Oil Prices Up

The latest narrowing of the two prices resulted from fresh worries about the Chinese economy, a main driver of oil growth, which is showing some strains. Speculation that China may tighten lending policy could put a damper on economic growth in that country, which in turn would slow demand for oil. Another concern is emerging market currencies, which have taken a beating in 2014. Ukraine is the most obvious, with its currency, the hryvnia dropping 7.7% on February 26. Turkey’s lira also dropped another 0.5%. Bloomberg reports that a group of 20 developing-country currencies declined 0.2% as well. Taken together, these broad economic concerns are bringing down Brent crude.

At the same time, the Energy Information Administration released weekly data that showed that inventories of oil at Cushing, Oklahoma fell by 1.08 million barrels to 34.8 million – their lowest level in four months. Lower inventories in the U.S. from a big drawdown during the cold weather are supporting higher WTI prices, which have increased over the past few months.

By James Burgess of Oilprice.com



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