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Commodity Nugget: The Spread Between Light Sweet and Brent

We posted two days ago on the steep contango curve in the oil futures curve and wanted to highlight another interesting discrepancy in the Oil market. As outlined in the chart below, the divergence between the price of West Texas Intermediate and Brent has reached an extreme at more than $10 currently.

Brent oil is pumped from the Brent formations in the North Sea, while West Texas Intermediate is pumped from, as the name denotes, the oilfields of Western Texas. The key differentiator between the two grades of oil is that West Texas Intermediate is lighter and sweeter, so is of higher quality than its North Sea counterpart.

All things being equal, consumers will use light sweet oil from West Texas before its heavy counterpart from the North Sea. As such, historically West Texas Intermediate has traded at a slight premium to Brent. Currently that spread has reversed, and as outlined in the chart below, the price of Brent is trading at an almost $10 premium. The implication of this is that oil demand in the U.S. is very weak relative to the rest of the world, which was also evidenced by this week’s DOE report.

As the divergence below suggests, determining the inflection point to a more balanced supply / demand picture in the U.S. will indeed be critical in determining the next up Trend move in oil. On the downside, we see USO (United States Oil Fund) testing the $28 level in the coming weeks.

Daryl G. Jones
Managing Director