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Forget Oil Prices, Focus on Differentials

By Elliott H. Gue on Jun. 14, 2018

In last week’s issue we covered some of our broad thoughts and take-aways from this year’s MLP and Energy Infrastructure Conference (MEIC) conference including our view on a potential OPEC-plus agreement to increase production at the cartel’s meeting on June 22nd.

Over the past two weeks the big story in energy markets hasn’t been oil prices but oil price differentials and that relates to another major theme discussed at length at MEIC.

Just consider: Brent oil closed on Friday the 25th May at $76.44/bbl and as of the latest close it was trading at $76.65, up slightly over the past week. Meanwhile, energy stocks, as measured by the SPDR Oil & Gas ETF (NYSE: XOP) and the Alerian MLP Index are also trading higher.

However, scratch beneath the surface and there’s a lot more going on.

While Brent crude oil prices are trading around $76.65, the key US oil benchmark, West Texas Intermediate, ended the latest session at $66.88 trading at a near $10/bbl discount to Brent. Over the long haul, these two crude oil benchmarks – representing light, sweet oils of nearly identical quality – have traded roughly at parity.

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