Global crude oil trade patterns have shifted since Russia’s full-scale invasion of Ukraine and have particularly affected countries in Europe. The EIA expects that these shifts will continue as the EU reduces crude oil imports from Russia, potentially by as much as 90% by the end of the year. As a result, the EIA has updated its forecast for the spread between the Brent crude oil price and West Texas Intermediate (WTI) crude oil price in the EIA's August Short-Term Energy Outlook (STEO).
Since March, the Brent-WTI crude oil price spread has averaged US$6.73/bbl, up from the 2021 average of US$2.69/bbl. Although we forecast the spread to decline from the July 2022 average of US$10.31/bbl to US$6.00/bbl in 2023, this forecast still represents an increase from the EIA's July STEO forecast of US$4.00/bbl for 2023.
Crude oil price spreads reflect several factors, such as:
- The logistical cost of moving crude oil from a producing region to a destination.
- Planned or unplanned production outages.
- Local storage, distribution, or other infrastructure constraints.
- Changes in demand for certain grades of crude oil because of their quality and yield.
Russia has historically accounted for a substantial volume of Europe’s imports of crude oil. As European refiners move business away from Russia, they need new sources of crude oil to maintain refinery utilisation rates and fuel production. This need for new sources is contributing to higher crude oil prices in Europe to attract crude oil exports to the region. The Brent crude oil price serves as both the global crude oil price benchmark and the regional price benchmark for Europe’s crude oil. Because more crude oil is consumed in the European market than produced, Brent crude oil is often priced at a premium to other similar crude oil grades. Compared with other waterborne crude oils such as Dubai and WTI Houston, the Brent price increased significantly in late February 2022, reflecting strong demand in Europe for crude oil imported from producing regions other than Russia.
According to the EIA's Petroleum Supply Monthly, US crude oil exports to Europe averaged 1.59 million bpd in April 2022, the most on record until May, when exports climbed even further to 1.65 million bpd. At the same time, US crude oil exports to Asia and Oceania averaged 1.08 million bpd in April, the least in any April since 2018, before increasing to 1.34 million bpd in May. US exports to Asia decreased because crude oil volumes were being diverted to Europe and because demand for crude oil imports dropped in China as several cities in the country, including Shanghai, entered strict mobility restrictions in response to outbreaks of COVID-19 in March and April.
WTI crude oil serves as the regional benchmark that reflects the price of crude oil in the US. The US remains a net importer of crude oil, and most imports come via pipeline from Canada. As the US has gradually reduced imports and increased exports of crude oil, particularly out of the US Gulf Coast (PADD 3), WTI crude oil has shifted toward pricing at export parity. Typically, this trend translates into the crude oil being discounted to reflect the cost of shipping because it is priced on a free on board (FOB) basis. In contrast, when the US was a significant importer of waterborne crude oil, the WTI price was higher to reflect the cost of shipping and piping the crude oil up the Gulf Coast and into the primary WTI storage and pricing hub at Cushing, Oklahoma, US. Since January 2017, the US has exported increasing volumes of crude oil, primarily to East Asia where crude oil demand exceeds supply. The US has also exported crude oil to Europe, and those exports have had to remain price competitive with barrels imported into Europe from other parts of the world, such as Russia or Africa, which are geographically closer. US exports to Asia also face price competition with other Atlantic Basin producers, which is why prices of both WTI Cushing and WTI Houston crude oil developed a consistent discount to Brent crude oil.
In recent months, not only have US crude oil exports to Europe increased, but less North Sea crude oil has shipped to China. This trend is due in part to a slight decline in China’s crude oil imports during 2Q22, compared with both 2Q21 and 1Q22. However, the origin of crude oil imports into China has also changed. Crude oil imports into China from countries outside the Atlantic Basin increased in the second quarter, whereas imports from countries in the Atlantic Basin decreased. China imported no crude oil from the UK in May and June, and imports in April were less than half the monthly average from the previous year. The relatively high Brent crude oil price is likely deterring China from importing crude oil from North Sea producers.
Although the EIA now forecasts that the differential between the Brent and WTI crude oil prices will remain higher than pre-2022 levels, it is expected that the outright prices for both crude oil grades will continue decreasing through the end of the forecast period.
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