The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, are up about 8% and nearly 11%, respectively, over the past month.
Still, some market observers believe West Texas Intermediate remains inexpensive relative to Brent, the global benchmark. That at a time when U.S. production is soaring and approaching all-time records. By some estimates, the U.S. could pass Russia as the world’s largest oil producer as soon as later this year.
“Another reason for the shrinking price differential was because some additional pipeline capacity took oil away from Cushing, Oklahoma, the reference point for WTI. Finally, U.S. crude exports have surged over the past few quarters, helping to drain the U.S. surplus,” reports OilPrice.com. “And yet, over the past week, the Brent-WTI disparity has widened once again, opening up to $5 per barrel, about twice as much as just a few weeks ago.”
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The expanding global economy has increased demand for commodities and drawn down oil inventories. For instance, according to the Energy Information Administration, U.S. crude stockpiles have declined for the past 10 consecutive weeks and are now at their lowest level since 2015.
Rising U.S. Shale Supplies
The widening Brent/West Texas spread could be indicative of rising shale supply.
“The divergence is a reflection of rising supplies in the U.S. at a time when the oil market looks rather tight pretty much everywhere else. U.S. shale continues to expand at a torrid pace, up around 400,000 bpd since the end of 2017. The rig count has exploded, as most shale companies believe they can make money with WTI north of $60,” according to OilPrice.com.
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Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
“The global oil market looks bullish at time when the bulk of new supply is overwhelmingly concentrated in the United States. These differences in market conditions in the U.S. relative to the rest of the world are reflected in the widening price differential between WTI and Brent,” reports OilPrice.com.
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