The brent-wti spread moves to a new level – the united states brent oil etf, lp (nysearca bno) seeking alpha gas in back and chest


Brent and WTI crude oils are the two benchmarks for prices of the energy commodity all over the world. Approximately two-thirds of consumers and producers use the Brent price while the balance use WTI. Brent trades on the Intercontinental Exchange while West Texas Intermediate crude oil trades on the NYMEX division of the CME. Each petroleum exchange has specific delivery characteristics. WTI is a lighter and sweeter crude oil that is more suitable for the production of gasoline. Brent has a higher sulfur content and is more appropriate for the production of distillate products like heating oil, jet and diesel fuels.

Brent versus WTI is both a location and a quality spread. The quality comes from the sulfur content; the location spread is a function of where production occurs. WTI’s delivery point is in Cushing, Oklahoma. Brent is in the North Sea, but the majority of oil produced in Europe, Africa, and the Middle East uses the Brent price as its benchmark. Since the Middle East is the world’s most politically turbulent region, the price differential between the two benchmarks also serves as a political risk barometer for the energy commodity when it comes to the Middle East which is home to more than half the world’s oil reserves. A new high in Brent and the spread

As the weekly chart shows, the Brent premium over WTI crude oil moved from $2.87 at the end of February to a high of $8.72 per barrel last week on May 17. Brent traded to its highest level versus WTI since March 2015. The rise in the spread put the price of Brent at a high of $80.50 per barrel. Two factors are pushing the price of Brent higher. First, an increase in shale production in North America pushed U.S. output to well over the 10 million barrels per day level. The U.S. is now one of three producing nations in that category alongside Saudi Arabia and Russia. The higher price of the energy commodity continues to support shale output. The number of oil rigs in operation stood at 844 on May 18. Last year at this time, there were 720 rigs pumping oil in the United States. The second reason for the rise in the spread is the rising political temperature in the Middle East. Political risk rises in oil

Only a few weeks ago, the Trump Administration refused to recertify the Iran nuclear nonproliferation agreement and will likely impose new and severe sanctions on the theocracy in Teheran. Meanwhile, the expansionary desires of Iran in the Middle East increased tensions with their arch-enemy in the region, Saudi Arabia. The two are involved in a proxy war in Yemen. Over recent weeks, Iranian-backed rebels fired missiles into Saudi Sovereign territory. At the same time, the blockade of Qatar by the Saudis and their Gulf State allies is another front in the brewing hostilities with Iran in the region. As the temperature rises, the potential for war or sporadic conflicts in the area that could impact production, refining, and logistical route for oil has increased to a level not seen in many years. The rise in the Brent Spread is a direct result of uncertainty and a problematic situation in the world’s most politically unstable area. A strong correlation since 2010

The line chart of the spread (blue) and the price of NYMEX WTI futures (Black) shows the correlation between the spread and the price of oil. From 2010 through 2014 when NYMEX crude oil was trading between $80 and over $100 per barrel the spread ranged from $2 to its highs at $27.64. In February 2016, NYMEX crude oil hit its low at $26.05 per barrel, and the spread was at flat to a small premium for WTI. As the price of the energy commodity has been working its way higher over recent months, the Brent spread has been trending higher, and the premium over WTI has increased. If crude oil is heading towards or over the $100 per barrel level, we could see Brent move back to over a $10 premium to WTI. The other interesting factor about the spread is that it has led the move in the price of oil. A rise in the Brent spread to a higher high tends to lead the price of the energy commodity to the upside. The most recent move in the Brent spread could be telling us that $75 or $80 is in the cards for the price of oil over coming weeks. OPEC meets at the end of June

The next meeting of the international oil cartel will take place on June 22 in Vienna, Austria when the oil ministers of OPEC nations sit down to discuss their policies for production. The Saudis have already said that they expect the Brent price to rise to the $85 per barrel level, which is only $4.50 above its most recent peak.

While OPEC agreed to extend production cuts to the end of 2018 at their late 2017 meeting, the upcoming gathering is likely to provide a bit more intrigue given the uncertainty surrounding Iran and the acrimonious relationship between Saudis Arabia and the theocracy. The Russians have been an influential outside party when it comes to OPEC policy as they have acted as a go-between between Iran and the Saudis. A continuation of Russia brokering will be a necessary element in any OPEC policy initiatives. Additionally, upcoming sanctions on Iran could change output quotas. To complicate matters, the Russians are close allies of Iran while the U.S. is in the same position with the Saudis. Uncertainty continues to support the price of crude oil these days, and the technical picture remains bullish.

As the monthly chart highlights, the technical level for NYMEX crude oil futures stood at $62.58 per barrel, and the price did not take long to rise above that level in January of this year. Now that crude oil is north of $72 per barrel, the next level of resistance is more than $30 above the current price at the June 2014 high at $107.73. Therefore, there are lots of blue skies in the oil market for bulls from a technical perspective.

The Brent-WTI spread has been making higher lows and higher highs since February 2016 when the price of oil found a bottom at $26.05 per barrel on the nearby NYMEX futures contract. During that month, the spread was trading around flat. These days, the Brent spread could be telling us that the path of least resistance for the price of oil remains bullish and that Brent will continue to outperform WTI prices.

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