Brent $106, WTI $94: What's Behind The Widening Gap Between Oil Benchmarks

The gap between the two global oil benchmarks has widened in recent period. On Wednesday, Brent futures were trading between $106 and $107 a barrel, whereas the West Texas Intermediate hovered near $94-$95.

Three months ago, they were barely apart. In early July, the gap was about $4. By Monday, the December contracts of the two oil derivative benchmarks stretched their gap to $13.85. The last time a similar scenario emerged was in March, when WTI's discount hit $12.63, the widest since 2014.

The explanation has less to do with oil than with ships. Brent is priced on seaborne barrels, so what it costs to move crude by sea ends up in its price. WTI is priced inland at Cushing, Oklahoma, and largely escapes it.

“Because Brent is priced on waterborne delivery, these shipping premiums directly inflate Brent's price,” B. Riley Wealth's Art Hogan said, as quoted by Vantage Markets in an October 6 note. The disruptions in the Suez Canal, Bab el-Mandeb or the Strait of Hormuz force longer routes and raise freight and insurance costs.

Those costs have exploded, with freight on cargoes leaving the Persian Gulf has gone from $1.73 a barrel in January to about $33, according to Poten & Partners data cited in reports last week.

Why American Oil Is Not Closing The Gap

A wide discount should pull US crude overseas and narrow the spread. However, analysts say that is not happening as shipping has become acutely expensive amid the escalating tensions in the Middle East.

A supertanker voyage from the US Gulf to China costs about $40 a barrel, Reuters reported on Oct. 9, citing shipping data from Simpson Spence Young (SSY). That is roughly three times the gap, which means the discount on WTI is too small to pay for the trip to Asia.

However, some of the analysts point out that the squeeze is in fuels more than in crude. There were fears that Washington could ban diesel exports to address domestic shortage ahead of the November mid-term polls, which would cut US refiners' demand for crude. This was, till last week, seen as a leading explanation for WTI's weakness. Those fears faded after US President Donald Trump announced various measures, including an "energy truce" between Russia and Ukraine, to improve the diesel supplies.

Polymarket traders now see about a 2% chance of a US diesel export ban by Oct. 31, against 12% at the start of the month, reports said. According to Wood Mackenzie, a ban could cut US refinery crude runs by more than 2 million barrels a day, about 12%.

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Where It Could Go From Here

Forecasters expect the gap to narrow, but not soon. Goldman Sachs raised its December Brent forecast to $90 from $85, with a risk premium of just over $20 a barrel, and sees WTI at $81 in December and $73 in 2027.

The US Energy Information Administration's October outlook forecasts Brent at $104.69 in the fourth quarter and WTI at $97, a gap of about $7.70, and about $4 in 2027.

For much of world's oil buyers, the lesson is that the cheaper benchmark may not be cheaper to buy, due to the higher risk premiums. Indian refiners are paying as much as 35-40% more for crude than they were a month and a half ago, persons privy to the matter told NDTV Profit last month.

The cost of crude for Indian refiners has risen to about $135-140 a barrel, compared with Brent at around $105-$109, the sources said. Notably, the $109 price is for delivery of barrels in November. Some refiners have paid as much as $150 a barrel for prompt cargoes as competition intensifies for barrels that can be delivered on time, they added.

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