Long WTI & Short Brent as price differential tightens?

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Oil Brent continues to trade at a premium of more than $8 per barrel to WTI oil, with the price difference between the two oil benchmarks increasing significantly and well above its historical average this year.

One of the primary drivers of the widening Brent/WTI price spread has been a significant increase in the availability of North American crude, which has created more downward price pressure on the WTI market.

The US government has injected180 million barrels of crude into the market through scheduled Strategic Petroleum Reserve (SPR) releases as of October 18, 2022, to help resolve the market supply disruption created by Russia's full-scale invasion of Ukraine and to help cut energy costs.

U.S. SPR releases are now complete, and crude oil reserves in the United States are at their lowest point since 1983, according to the latest estimates from EIA.

The possibility that the Democrats would suffer a loss in the midterm elections in two weeks might rule out the possibility of more SPR releases being made at a later stage.

In this scenario, the forces that pushed the price of WTI below that of Brent would diminish significantly. As a result, the price spread between the two oil benchmarks may return to tighter levels. Going long on WTI and short on Brent is one way to reflect the idea of closing this oil price gap.

Throughout 2021, the difference between WTI and Brent was on average about -22/BBL and ranged from -44.5/BBL to parity levels.

A mean reversion to the period prior to US SPR releases would suggest an increase from current prices of about 6.5/bbl. If, on the other side, the spread widens again and breaks through the -110/BBL threshold, the strategy will be proven incorrect.